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Monday, Mar 31, 2025 | India

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Global Debt Crisis: Developing Countries Struggle Under Rising Borrowing Costs

Rising global debt burdens developing nations, forcing them to prioritise interest payments over essential services. Experts urge urgent debt relief and fair cooperation to prevent deepening financial and social crises.

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Author: Saurav Kumar

Published: March 26, 2025

Global debt reached a record $318 trillion in 2024, driven by rising government borrowing and surging debt in emerging markets. According to the recent data of the United Nations Conference on Trade and Development (UNCTAD), more than 54 developing countries are dedicating a significant portion of their revenue to servicing debt interest, impacting their ability to invest in crucial public sectors such as health and education.

54 Developing Countries Spend Heavily on Interest, Mainly in Africa

A record 54 developing countries, particularly in Africa, are allocating substantial portions of their national budgets toward interest payments. This rising financial commitment reduces resources available for critical public services. Countries across Sub-Saharan Africa face the harshest conditions, with several spending more on debt service than on essential social programs.

Image: Data highlighting developing countries with highest interest payments

UNCTAD reports reveal that for every dollar spent on education or health, a higher amount is channeled toward repaying debt interest in these nations. This debt-servicing pressure exacerbates socio-economic inequalities, hindering long-term development goals. As a result, millions in low-income countries struggle to access quality education and healthcare services. 

Notably, a few weeks ago, the Vatican backed expert panel called to tackle the global debt crisis by proposing economic reforms for a just and sustainable financial system.

Borrowing Costs of Developing Countries Exceed Developed Nations

The borrowing costs for developing economies are significantly higher than for advanced economies like the United States and Germany. Developing countries often pay four to eight times more in interest compared to their developed counterparts. This discrepancy arises due to perceived credit risks, volatile financial markets, and limited access to low-interest loans.

Net interest payments on public debt reached US$ 847 billion in 2023, a 26% increase compared to 2021, further straining national budgets and limiting resources for public welfare.

Image: Increasing interest rates of developing countries

Image: Borrowing costs of developed and developing countries

For example, while countries such as Germany and the U.S. borrow at rates as low as 1-2%, many African and Asian countries face double-digit interest rates on external loans. This disparity means that while developed nations accumulate debt at a manageable cost, developing economies are trapped in a vicious cycle where rising interest payments prevent sustainable growth and economic recovery.

As borrowing costs soar and social spending shrinks, experts are calling for urgent, large-scale debt relief to prevent developing nations from sinking deeper into financial distress.

As per Yemi Osinbajo, Former Vice President of the Federal Republic of Nigeria, “A debt solution must rest on two pillars. First, countries in severe debt need comprehensive restructuring with fair cooperation from all international creditors. An urgent, large-scale debt relief initiative—like those in the early 2000s—is crucial to prevent deeper debt traps. Long-term, a global mechanism for sovereign debt restructuring is essential.”

“For countries with manageable debt, the focus should be on lowering borrowing costs and offering financial flexibility. Credit support from multilateral institutions and temporary debt suspension can help them achieve climate and development goals,” he added.

People Affected as Interest Payments Skyrocket

A staggering 3.3 billion people across developing countries live in regions where interest payments exceed public spending on essential services like education and healthcare. According to UNCTAD, between 2020 and 2022, over 2.1 billion people reside in countries where debt servicing outpaces education expenditure, while 3.3 billion people are affected by governments prioritizing debt over health investments.

 

Image: 3.3 billion people in developing countries that spend more on interest rates than education and health

The consequences of this imbalance are profound. In nations struggling with high debt burdens, social welfare programs remain underfunded, leading to inadequate healthcare, compromised education, and increased poverty levels. With public resources directed towards debt repayment, there is little room for investments in sustainable development and climate resilience.

Sri Lanka’s economic crisis worsened due to the staggering interest rates the government had to repay to the IMF. This repayment came at the cost of the provident funds of retired citizens.

As global debt reaches unprecedented levels, addressing the growing disparity between developed and developing economies remains crucial. Experts are advocating concessional financing, and reforming the global financial architecture to support vulnerable nations.

Tags:Global Debt CrisisUnited Nations Conference on Trade and DevelopmentUNCTADDeveloping CountriesBorrowing CostsAfricaAsiaLatin AmericaYemi OsinbajoNigeria