12/13/2025
๐จ๏ธ ๐๐๐๐๐๐๐ ๐๐๐๐-๐๐๐๐๐๐๐๐ ๐๐๐๐๐๐๐๐๐ ๐๐ ๐ ๐๐๐๐๐๐๐๐๐๐๐ ๐๐๐๐
A paradox is unfolding across developing economies. On the bright side, inflation is finally abating. The oppressive interest rates of the last five years are beginning to ease, suggesting that the crushing debt service burdens many countries have faced might start to shrink. For the right price, foreign bond investors are once again willing to provide financing, allowing many countries to stave off default.
But for most countries, these are small consolationsโnot enough to overcome the grave setbacks of this decade. The latest World Bank data show that the upheavals of the early 2020s produced a financial riptide like no other. Between 2022 and 2024, about $741 billion more flowed out of developing economies in debt repayments and interest than flowed in through new financing. This was the largest debt-related outflow in more than 50 years. And the human toll has been steep. Among the 22 most highly indebted countries, one out of every two people cannot afford the minimum daily diet necessary for lasting health.
Policy makers must make the most of the breathing room that exists today, because it could disappear tomorrow without warning. That means putting the debt burdens of developing countries back on a sustainable pathโby getting the fiscal house in order and reducing sovereign risks in ways that spur productive investment. It also means modernizing the global systems meant to avert debt distress by sounding the alarm before countries stray off the path and by helping them restructure their debts swiftly once the crisis arrives.
In 2024, the total external debt stock of low- and middle-income countries hit a new record of $8.9 trillion. This includes the $1.2 trillionโalso a recordโowed by the 78 most vulnerable countries eligible for grants and low-cost loans from the World Bankโs International Development Association (IDA). Itโs a bad moment for this type of record-breaking, because average interest rates for developing countries havenโt been this high since just before the financial crisis of 2008โ09. These countries paid a record $415 billion in interest alone, money that could have otherwise helped reduce the rising ranks of out-of-school children, improve primary health care, and electrify rural villages.
There has been progress, of course, but itโs been modest, and considerably more is needed. Debt burdens are now growing more slowly. Creditors were in a forgiving mood last year, agreeing to restructure $90 billion in developing country debtโthe most since 2010. Ghana, Haiti, Somalia, and Sri Lanka, for example, secured restructuring agreements that shrank their long-term external debt by between 4 and 70 percent. Thanks to the work of the Global Sovereign Debt Roundtable, led by the International Monetary Fund (IMF) and the World Bank, Ghana completed its restructuring with its official bilateral creditors in half the time it took for previous restructurings under the Group of Twentyโs Common Framework for Debt Treatments.
Yet itโs no easier for developing countries to stay clear of a debilitating debt trap today than it was a decade ago. It would be foolish to expect that the human misery caused by the next debt crisis will be milder than the most recent one. Thatโs because the global machinery for managing crises has not kept up with the times. It was built for an era when developing economies owed most of their external debt to the World Bank, the IMF, and a handful of high-income economies, all of which provided loans at below-market rates. But today, private creditorsโbond investors mostlyโhold nearly 60 percent of the long-term public and publicly guaranteed debt of developing economies. Debt owed to Paris Club creditors, the longtime overseers of the global debt-restructuring system, now accounts for only about 7 percent.
That imbalance helps explain why restructurings in the 2020s have been so sluggish. Decision-making authority has shifted beyond the reach of the Paris Club and is now dispersed among millions of bondholders and a kaleidoscope of governments in high- and middle-income economies. As a result, debt restructurings happen through a maze of complex processes. Itโs either via the Common Framework, the emergency mechanism introduced during the COVID-19 period to support debt-distressed countries, or through one-off deals with governments and bondholders.
The early-warning system for managing the debt of low-income countries is equally overdue for an update. It was designed for an era when domestic debt markets were undeveloped and foreign private creditors were almost entirely absent. Today, the opposite is true. The system, officially the Low-Income Country Debt Sustainability Framework, is up for review this year and should be overhauled to reflect this new reality.
In 2024, bond investors turned on the spigots again. After retreating from developing economies only the year before, they charged back in, pumping $80 billion more in new disbursements than was repaid in debt. That inflow allowed some countries to ease their financial squeeze. Several completed multibillion-dollar bond issuances, either to finance budget deficits or pay off maturing bonds. But this was hardly low-cost borrowing: interest rates reached as high as10 percent, roughly double the pre-2020 rate.
Not all developing countries, however, have been able to tap foreign bond markets, and other options became scarcer in 2024. Official bilateral creditorsโgovernments and government-related entitiesโretreated, collecting $8.8 billion more in principal and interest than they disbursed in new financing. Most developing countries turned instead to domestic creditors. Among the 86 nations for which domestic debt data are available, more than halfโ50 in allโsaw their domestic government debt grow faster than external government debt. This type of borrowing usually comes at a cost to the private sector: local commercial banks load up on government bonds when they should be lending to the private sector. Domestic debt also involves shorter maturities, creating greater risk when loans mature and must be refinanced at a potentially higher interest rate.
The time has come to stop tempting fate. Mismanagement of developing-country debt is putting the brakes on economic development and pushing too many nations into a devilโs bargain: borrow at high cost from foreign bondholders or stifle the domestic private sector by soaking up the assets of domestic commercial banks. The World Bank has remained a major lifeline for the most vulnerable countries: In 2024, it provided $18.3 billion more in low-cost financing to countries eligible for IDA assistance than it received in principal repayments from them. That amount was an all-time high, but the laws of gravity cannot be defied forever.
Debt is still building in pernicious ways. Even if countries had options to climb out of the hole quickly, governments should not be risking debt distress: the long-term human costs are simply unaffordable. But such options are hardly abundant todayโand there are few signs that anything will change soon. Unless it does, the easing of financial conditions today could encourage poor and vulnerable countries to sleepwalk into a larger calamity tomorrow.
โ๏ธ ๐๐บ ๐๐ฏ๐ฅ๐ฆ๐ณ๐ฎ๐ช๐ต ๐๐ช๐ญ๐ญ, ๐๐ฉ๐ช๐ฆ๐ง ๐๐ค๐ฐ๐ฏ๐ฐ๐ฎ๐ช๐ด๐ต ๐ฐ๐ง ๐ต๐ฉ๐ฆ ๐๐ฐ๐ณ๐ญ๐ฅ ๐๐ข๐ฏ๐ฌ ๐๐ณ๐ฐ๐ถ๐ฑ ๐ข๐ฏ๐ฅ ๐๐ฆ๐ฏ๐ช๐ฐ๐ณ ๐๐ช๐ค๐ฆ ๐๐ณ๐ฆ๐ด๐ช๐ฅ๐ฆ๐ฏ๐ต ๐ง๐ฐ๐ณ ๐๐ฆ๐ท๐ฆ๐ญ๐ฐ๐ฑ๐ฎ๐ฆ๐ฏ๐ต ๐๐ค๐ฐ๐ฏ๐ฐ๐ฎ๐ช๐ค๐ด
