Sierra Leone faces interconnected macroeconomic challenges, including high debt-servicing costs, a domestic debt market concentrated among commercial banks, persistent inflationary pressures, exchange rate vulnerabilities, and limited private-sector access to credit.
CABRI engaged with Dr Joseph Alimamy Thullah, Assistant Director of the Public Debt Management Division at Sierra Leone’s Ministry of Finance, and Dr Sangarapillai Sangarabalan - a public debt management expert, to explore the underlying drivers of these challenges and the policy measures being implemented to address them.
Macroeconomic Stabilisation and Public Debt Management
Sierra Leone has made significant progress in restoring macroeconomic stability following one of the most severe inflation episodes in its recent history. Headline inflation, which exceeded 52% in 2023 amid global economic shocks and rapid domestic liquidity expansion, declined sharply to approximately 15,7% by August 2026. In response, the Bank of Sierra Leone (BSL) implemented an aggressive monetary tightening cycle, raising the Monetary Policy Rate (MPR) and maintaining a restrictive policy stance to anchor inflation expectations and restore confidence. Despite the substantial decline in inflation, the MPR remains elevated at 17,25%.
The current interest rate environment presents both opportunities and challenges for public finances. Yields on the 364-day Treasury Bill have fallen significantly from a peak of about 41,3% to around 15%, reducing the cost of short-term government borrowing. Notably, the 364-day Treasury Bill has become the preferred instrument among investors and is currently trading at lower yields than the 91-day Treasury Bill.
However, domestic debt remains highly concentrated in the banking sector, with commercial banks holding more than 56% of outstanding domestic government securities. While this concentration has provided a reliable source of financing for the government, it has also increased the interdependence between the sovereign and the banking system. The dominance of government securities in bank portfolios contributes to a crowding-out effect, as banks allocate resources to sovereign debt rather than private-sector lending. This constrains credit to productive sectors of the economy, limiting investment, job creation, and economic diversification.
Although lower yields have eased borrowing costs, the domestic debt burden continues to place considerable pressure on the budget. In 2026, , total debt-service payments are projected to reach NLe 8.6 billion, equivalent to 4.6% of GDP, of which NLe 6.4 billion relates to domestic interest payments. Consequently, debt servicing absorbs a substantial share of fiscal resources, limiting the government’s ability to expand spending on critical sectors such as education, healthcare, and infrastructure.
External debt remains another important source of vulnerability. Sierra Leone is assessed by the IMF as having weak debt-carrying capacity, while debt-service obligations continue to absorb a significant share of government revenue. External public debt-estimated at between US$1.8 billion and US$2.3 billion is largely owed to multilateral institutions on concessional terms. However, because these liabilities highly exposed to exchange rate risk. A depreciation of the Leone would significantly increase the domestic currency cost of debt servicing. This risk is amplified by limited foreign exchange reserves, estimated at only 1.5 to 1.8 months of import cover, leaving the economy vulnerable to external shocks and exchange-rate pressures.
Reform Priorities for Developing the Domestic Debt Market
Against this backdrop, reducing inflation to single-digit levels, maintaining macroeconomic stability, accelerating economic growth, and strengthening domestic savings mobilisation remain central to the development of a sustainable domestic debt market.
Lower and more stable inflation would help anchor investor expectations, reduce risk premia, and lower the government securities yields. At the same time, stronger economic growth would increase the pool of resources available for investment in government securities. Continued fiscal consolidation, including maintaining budget deficits below 3% of GDP, would further reduce government borrowing requirements and alleviate pressure on domestic debt markets. Collectively, these measures would create an enabling environment for deepening domestic capital markets, enhancing investor confidence, and reducing the government's borrowing costs over time.
As macroeconomic conditions continue to improve and investor confidence deepens, demand for longer-term government securities is likely to increase. This would enable the government to gradually extend the maturity profile of domestic debt, reduce its dependence on short-term Treasury bills, lower refinancing and rollover risks, and enhance the predictability of financing costs. A key component of the reform agenda is therefore the transition towards longer-term debt instruments and the development of the domestic bond market. By reducing reliance on short-term borrowing, the authorities aim to smooth the debt-servicing profile, strengthen fiscal resilience, and establish a more sustainable framework for domestic debt management.
Another key objective is to broaden the investor base and increase competition within the government securities market. Expanding participation beyond commercial banks to include pension funds, insurance companies, collective investment schemes, and other non-bank financial institutions would deepen the domestic capital market, improve price discovery, and reduce concentration risks. However, attracting new market participants must be accompanied by robust regulatory oversight to ensure that investors remain financially sound and comply with prudential and market conduct requirements.
In addition, reforms should focus on strengthening market infrastructure and improving operational efficiency. This includes enhancing auction systems, modernising securities registration and settlement processes and strengthening secondary market trading arrangements. Greater efficiency, transparency, and reliability would bolster investor confidence, support more effective debt management, and contribute to lower borrowing costs over time.
Lastly, Sierra Leone’s external debt portfolio remains heavily concentrated in concessional financing from multilateral institutions, particularly the World Bank and the African Development Bank. Given the country’s constrained fiscal position -continuing to prioritise concessional financing remains a prudent borrowing strategy, as these loans offer long maturities, extended grace periods, and relatively low interest rates. However, the benefits of concessional financing depend on the productive use of borrowed resources. External borrowing should be directed towards economically viable projects that are implemented efficiently and generate measurable economic and social returns.
The principal risk associated with concessional debt is exchange rate depreciation, which can significantly increase the domestic currency cost of servicing foreign-currency-denominated obligations. Maintaining macroeconomic stability, preserving adequate foreign exchange reserves, and strengthening public investment management are therefore critical to ensuring that external borrowing supports long-term development objectives without compromising fiscal and debt sustainability.