Many emerging economies must borrow to grow. But borrowing smartly — not just borrowing more — can protect governments from crises and build stronger financial futures.
Most developing countries face the same dilemma: Without exportable natural resources such as oil or minerals, they cannot fund long-term economic development on their own. Roads, schools, hospitals and industries all require money, and when domestic revenues fall short, governments turn to borrowing. They may borrow inside the country or abroad, through private lenders or public channels.
In principle, governments do not interfere with private-sector borrowing, including banks. But economic conditions sometimes require incentives or restrictions. History also shows the risks of disguising public borrowing as private borrowing. Before World War II, Germany used “private-sector borrowing” to mask government debt — a strategy that seemed effective in the moment but eventually produced severe financial pressures.
Responsible borrowing requires keeping interest costs low and choosing maturities that do not overwhelm future budgets. Governments must also avoid a primary deficit, the gap between revenues and spending before interest payments. Economists and lenders pay close attention to this number because it shows whether a government is living within its means. A country with a primary deficit usually needs to borrow more just to repay past borrowing, a cycle that becomes unsustainable.
To avoid this, developing countries can strengthen their borrowing strategies through a series of rarely discussed but highly practical reforms.
The central bank’s role
A central bank can dramatically influence how safely and cheaply a government borrows. Allowing the central bank to participate directly in Treasury auctions and buy domestic government securities stabilizes demand and prevents interest rates from rising unnecessarily. Many advanced economies already use this tool. The European Central Bank’s long-standing bond-purchase programs, as well as the Bank of Japan’s participation in bond markets, show how central banks can support stability without abandoning independence.
Broadening access to central bank open-market operations to include brokerage institutions alongside banks strengthens liquidity and helps create a more competitive market. Shifting away from automatic cheap funding toward overnight borrowing through the central bank allows interest rates to better reflect real financial conditions. When necessary, the central bank should also intervene in the bond market to ensure there is enough funding, similar to how the U.S. Federal Reserve prevented market collapse during the early days of the COVID-19 pandemic. Just as important, the central bank should offer guarantees only in local currency. Foreign-currency guarantees tie a country’s financial system to exchange-rate swings, one of the most common triggers of crises in emerging markets.
The treasury’s role
Treasuries may also diversify their borrowing instruments. One option is the issuance of lottery bonds, which do not pay interest but instead offer monthly prize drawings equivalent to the interest amount. This model is not theoretical. The United Kingdom’s Premium Bonds are the world’s most famous example and have attracted millions of savers for decades, reducing the government’s reliance on traditional interest-bearing debt.
Another tool is issuing medium-term Eurobonds denominated in U.S. dollars or euros, backed by domestic banks. If these bonds trade both internationally and on domestic markets, they become more attractive to investors. Making their returns exempt from taxes further boosts demand, helping the government borrow at rates closer to those in the originating currency. This reduces the need to borrow from foreign banks, which often charge higher risk premiums. Developing a nationwide credit-risk rating system for every individual and legal entity brings transparency and fairness to the financial system. Such systems are standard in the United States, the European Union, Japan and South Korea. When multiple rating agencies operate under clear rules, lenders can better evaluate risk, and borrowers face interest rates that reflect their real credit behavior.
Independent institutions
None of these reforms can function properly without strong, independent institutions. Central banks must be able to operate without political interference. National statistics agencies must provide reliable, unaltered data. Bank associations must maintain standards that protect financial stability. Investors and international institutions closely watch these bodies. When they are independent, borrowing becomes easier and cheaper. When they are politicized, borrowing becomes more difficult and costly.
A revived or strengthened state planning organization can ensure that both domestic and external borrowing align with long-term national goals rather than short-term political cycles. Terminating swap agreements between domestic banks and the Treasury prevents hidden liabilities from building up. Gradually reducing reserve requirements in both foreign and local currency allows banks to lend more flexibly. Over time, the government should shift away from external debt and toward borrowing in the national currency, as Brazil, Chile and South Korea have done. When foreign borrowing becomes necessary, project-based loans often provide better terms and clearer accountability.
A broader lesson
These measures do not replace traditional fiscal responsibility. They complement it. Smart borrowing requires transparency, strong institutions, and a long-term plan. Countries that diversify their financing tools, strengthen their central banks, and build independent statistical and financial institutions can borrow safely without falling into the traps that have hurt so many developing economies. In the end, borrowing is not the enemy. Borrowing without a strategy is.
Yaman Törüner is the former Governor of the Central Bank of Türkiye. Served as Chairman of the Istanbul Stock Exchange, and was a State Minister.
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