It is emerging that developing countries are ending 2025 facing one of their toughest financial years in decades, as new World Bank data reveals they paid out $741 billion more in external debt service between 2022 and 2024 than they received in new financing, the largest negative gap in at least 50 years.
The findings, contained in the World Bank’s latest International Debt Report, highlight deepening fiscal stress across low- and middle-income economies, where surging interest costs and limited access to affordable capital are squeezing growth and worsening living conditions.
A Costly Reopening of Bond Markets
Though global interest rates peaked in 2024 and international bond markets briefly reopened, the relief came at a steep price. Bond investors pushed in $80 billion in net new financing, enabling several countries to complete multi-billion-dollar issuances.
But borrowing costs averaged around 10%, twice the levels seen before 2020, leaving governments with heavier repayment burdens.
Countries also moved aggressively to avoid defaults, restructuring $90 billion in debt in 2024 , the most since 2010.
World Bank Chief Economist Indermit Gill warned that improved financial conditions should not be mistaken for safety.
“Developing countries should not deceive themselves: they are not out of danger,” he said.
Debt Levels Hit Historic Highs
By the end of 2024, the combined external debt stock of developing countries climbed to a record $8.9 trillion, including $1.2 trillion owed by 78 low-income nations eligible for concessional loans under the World Bank’s International Development Association (IDA).
Interest payments alone reached $415 billion, diverting resources away from essential public services such as healthcare, education, and infrastructure.
The social toll is severe: in the 22 most heavily indebted countries, 56% of the population cannot afford the minimum daily diet required for healthy living.
Developing Countries Shift Borrowing Homeward
As bilateral lenders pulled back — taking in $8.8 billion more in repayments than they disbursed — many governments increasingly relied on domestic markets to fill financing gaps.
More than half of 86 countries with available data saw domestic public debt rise faster than external debt.
The trend, while showing growth in local capital markets, raises fresh concerns. Heavy domestic borrowing often crowds out private-sector lending, forces banks to accumulate government securities, and exposes governments to short-term refinancing risks.
Multilateral Banks Are the Last Affordable Option
With external financing tightening, multilateral development banks emerged as the strongest backers. The World Bank alone provided $18.3 billion more to IDA countries in 2024 than it received in repayments, and extended a record $7.5 billion in grants.
A Narrow Window to Stabilise Economies
The report concludes that while some temporary relief emerged in 2024, debt vulnerabilities remain dangerously high. Policymakers, it warns, must use this limited “breathing room” to consolidate public finances rather than rush back into expensive external borrowing.
Gill summed up the urgency:
“Their debt build-up is continuing sometimes in new and pernicious ways.”
For developing economies already walking a fiscal tightrope, 2026 could determine whether they regain economic stability or slip deeper into a cycle of unsustainable debt.
