By Chidi Nwafor
When the instrument designed to protect fiscal space ends up destroying it
There is a number that has been sitting with me for a while. Over three billion people live in countries where debt servicing already exceeds spending on education or healthcare. At the same time, the SDG financing gap stands at USD 4 trillion per year. And the countries caught between those two realities – low-income, climate-exposed, fiscally constrained, are the same countries being told by their debt frameworks to tighten, consolidate, and adjust.
I work at the intersection of renewable energy project finance, ESG advisory, and blended finance architecture in Sub-Saharan Africa. From that position, I have had a front-row seat to something that does not appear in most debt sustainability analyses: the real cost of not investing. I want to talk about that cost. And I want to use a recent IISD policy report; Design Choices for Debt Sustainability as the analytical lens, because it puts its finger on exactly the right problem, even if it does not fully follow the argument to where it leads for African LICs specifically.
The Trilemma That Was Never Really Resolved: The IISD report, authored by Yanne Horas, Fernando Morra, and Anahí Wiedenbrüg, makes an important argument. Debt rules as they have been designed across 85 countries have failed to resolve what the authors call the trilemma of fiscal governance: the simultaneous demand for flexibility, simplicity, and enforceability. Pick any two. The third suffers.
The report documents how the incremental layering of debt rules, debt ceilings, budget balance rules, expenditure rules, revenue rules has produced frameworks of extraordinary complexity that are, paradoxically, both over-specified and under-enforced. Countries that have adopted all four types of fiscal rules simultaneously account for only 6% of the sample. Most operate with debt rules nested inside budget balance rules, with escape clauses of varying credibility and enforcement mechanisms that range from parliamentary approval to constitutional triggers to, in practice, nothing at all.
The solution proposed is what the authors call a constrained discretion regime, a shift away from rigid rules toward a framework anchored by a long-term debt target, supported by transparent fiscal strategy communication and independent institutional assessment. Enforcement gives way to accountability. Numerical limits give way to forward guidance. The fiscal council replaces the debt ceiling as the credibility mechanism.
I find this compelling as a reform architecture. But I want to push it further, specifically in the African context, because the report’s central argument has an implication that I do not think it states loudly enough.
The Classification Problem That Is Costing African Countries Billions: Here is the core issue as I see it from the ground. Current debt sustainability frameworks, whether IMF DSAs, World Bank assessments, or domestically designed fiscal rules classify spending primarily by its fiscal impact: does this increase the debt stock or not? Does this widen the deficit or not? That classification is not wrong. But for climate-vulnerable, infrastructure-poor economies in Sub-Saharan Africa, it is dangerously incomplete.
Let me give you a concrete example from the work I do. When I advise on the E&S frameworks for DFI-backed renewable energy and grid infrastructure projects in Nigeria, part of what I am doing is building the documentation architecture that allows a DFI to justify releasing concessional capital. The underlying logic of that capital, from the IFC, from AfDB, from GCF is that the investment reduces future risk. A grid-connected solar project reduces the fiscal exposure of the government to fuel import price volatility. A BESS installation reduces grid loss, improving distribution company revenue and reducing the sovereign contingent liability sitting behind a loss-making utility. An OGMP 2.0-aligned methane abatement programme reduces Nigeria’s exposure to the EU Methane Regulation’s import restrictions, which carry material consequences for upstream revenue.
These are not abstract climate co-benefits. They are quantifiable reductions in future fiscal risk.
But a debt ceiling does not see any of that. It sees the upfront borrowing. It counts the liability. It does not count the risk reduction. And so the framework that is supposed to protect fiscal sustainability ends up penalising precisely the investments that produce it.
This is not a design nuance. It is a structural bias embedded in the instrument itself.
The Feedback Loop Nobody Models: The IISD report has an excellent section on fiscal feedback loops; the dynamic by which fiscal adjustment aimed at stabilizing debt can, through its contractionary effect on growth, actually worsen the debt dynamics it was meant to address. This is the fiscal fatigue problem: governments required to run primary surpluses to service debt find that the social and political cost of doing so eventually outpaces the fiscal capacity to maintain it.
What the report does not model and what I see playing out in real transactions across Africa is the climate feedback loop that operates parallel to the fiscal one.
Consider the sequence: A country like Nigeria is told to maintain fiscal discipline and reduce its debt-to-GDP ratio. It therefore limits public capital expenditure on energy infrastructure. Private capital does not fill the gap at scale because, as I have argued extensively, the execution architecture is missing: the bankable project pipeline, the E&S frameworks, and the institutional confidence that DFIs require before committing. The energy access deficit persists. Industrial productivity remains constrained by unreliable power, which suppresses GDP growth, which in turn raises the debt-to-GDP ratio that the rule was designed to reduce.
Meanwhile, the physical climate risk compounds silently on the balance sheet. Flooding in 2024 affected over 1.4 million Nigerians and caused estimated losses exceeding USD 9 billion. The fiscal response required emergency expenditure that was not budgeted. The debt rule was breached, not because the government overspent on discretionary items, but because the cost of underinvesting in resilience eventually arrived as an emergency line item.
This is the feedback loop that current debt frameworks cannot see, because they do not distinguish between spending that creates fiscal risk and investment that reduces it over a medium-to-long-term horizon.
What a Constrained Discretion Regime Needs to Actually Work in Africa: The IISD report proposes three components for an adequate fiscal policy regime: a clearly stated long-term debt sustainability goal, a fiscal strategy that communicates intentions transparently, and an independent institution to assess and advise. The debt anchor provides the numerical reference. The fiscal council provides the accountability mechanism. Enforcement yields to transparency.
This is the right direction. But for African LICs and lower-middle-income countries operating with DFI oversight and IMF programme conditionality, the regime needs two additional design elements that the report does not address.
First: a climate investment carve-out with rigorous eligibility criteria. Not all public expenditure is equal. The fiscal rule should be capable of distinguishing between expenditure that increases debt risk and investment that reduces it over a defined time horizon. This is not a novel idea, several emerging market contexts have already moved in this direction with earmarking provisions for infrastructure or capital spending. But the eligibility criteria in an African climate context need to be anchored in something more robust than a spending category.
What I would propose, and what aligns with the kind of E&S and ESRM frameworks I design for DFI transactions, is an eligibility assessment aligned with IFC Performance Standards and, where applicable, TCFD-aligned climate risk metrics. If an investment can demonstrate a quantified reduction in physical climate risk exposure, or a reduction in transition risk in the form of fossil fuel import dependence or stranded asset liability, it should be treated differently in the debt sustainability calculation from discretionary current expenditure.
This is not a blank cheque for borrowing in the name of climate. It is a precision instrument. The eligibility criteria are rigorous. The verification is independent. The carve-out is bounded. What it removes is the current absurdity in which a Nigerian government can be penalised in its debt sustainability assessment for borrowing to build solar infrastructure that reduces the contingent liability behind a fuel-dependent, loss-making utility while the contingent liability itself sits off the fiscal framework entirely.
Second: the independent institution must have climate expertise, not just fiscal expertise. The IISD report correctly identifies the fiscal council as the anchor institution of the constrained discretion regime. But the fiscal councils that exist in most EMDEs – where they exist at all are staffed primarily by macroeconomists and public finance specialists. They can model debt dynamics, fiscal multipliers, and primary surplus requirements. They cannot model climate risk as a fiscal variable, because the methodology for doing so is still being developed at the frontier of climate finance practice.
From where I sit, advising on portfolio emissions assessments, climate scenario analysis for DFI transactions, and TCFD-aligned disclosure frameworks, the tools exist. PCAF methodology can attribute financed emissions. NGFS climate scenarios can stress-test fiscal balance under different warming pathways. IPCC Tier 3 MRV frameworks, which Nigeria’s NUPRC is now mandating for upstream operators by January 2027, can produce verifiable emissions data that forms the basis for climate-adjusted fiscal metrics.
The question is whether the institutional architecture of the constrained discretion regime has the capacity to use those tools. In most African LICs, the answer today is no. Building that capacity is not a peripheral reform. It is a precondition for the regime to function as designed.
The Investment That Becomes the Adjustment: When I am sitting across from a DFI team reviewing the E&S framework for a renewable energy project in Nigeria, both sides of the table understand something that a debt ceiling cannot capture: the investment we are structuring today is reducing a risk that would otherwise arrive as a fiscal emergency tomorrow. The solar installation prevents a fuel subsidy bill. The grid modernization prevents a blackout that suppresses industrial output. The methane abatement project protects upstream revenue from European regulatory risk.
This is not climate idealism. This is fiscal logic applied over the correct time horizon.
The IISD report argues, correctly, that the solution to the rules-based trilemma is not more rules but a better regime, one that replaces enforcement with accountability, and replaces rigid limits with anchored discretion. I agree. But I would add one more substitution that the African context demands.
We need to replace the current instrument’s inability to see risk-reducing investment with a methodology that can distinguish between debt that increases vulnerability and debt that reduces it.
Until that distinction is embedded in how DFIs assess debt sustainability, how fiscal councils evaluate fiscal strategy, and how IMF programme conditionality is calibrated, African governments will continue to face a choice that should not exist: maintain fiscal discipline by limiting the investments that produce long-term fiscal sustainability, or breach the rules that were designed to protect them.
Every flood that goes unmitigated because the fiscal rule blocked the resilience investment arrives eventually as an emergency budget line. Every year a loss-making, fuel-dependent utility stays unreformed because concessional capital could not clear the debt sustainability threshold is another year of suppressed industrial output and a widening debt-to-GDP ratio.
That is not a fiscal governance problem. It is a measurement problem. And measurement problems, in my experience, are solvable.
Nwafor Chidi is Founder/Lead Strategist of De-Lazuli Consult LTD and can be reached at chidi.nwafor@de-lazuliconsult.com
