Poorer Economies Are Borrowing Again, but Private Credit Is Charging Them the Most

Developing countries borrowed more heavily in 2025 as international markets reopened, pushing external debt to a record $9.4 trillion. But the return of finance came at a steep price, especially for the poorest economies, where borrowing costs climbed to multi-decade highs and refinancing risks shifting today’s repayment pressure into more expensive obligations tomorrow.

Developing countries entered 2025 with greater access to international finance, but the return of lenders did not bring back cheap money. External debt climbed 5.5% to a record $9.4 trillion, the fastest increase since 2021 and roughly four times the average pace recorded between 2022 and 2024, according to the World Bank Group's International Debt Report 2026. The increase marks a shift from restricted market access toward a more complicated problem: borrowing is becoming easier to secure while remaining expensive to sustain.

Private finance drove much of the expansion. Public entities issued $251 billion in bonds during 2025, nearly 35% more than a year earlier and the highest level in five years. International markets had reopened to many borrowers, giving governments more room to manage upcoming repayments and attract fresh capital, yet stronger issuance did not necessarily leave them with lighter debt burdens.

Refinancing has eased maturities without shrinking the debt load

A significant share of new bond activity was used to buy back debt approaching maturity. Such transactions can spread repayments over a longer period and reduce immediate refinancing pressure, but they do little to reduce the amount governments ultimately owe. When replacement bonds carry higher interest rates, the exercise can improve near-term liquidity while making future servicing more expensive.

Early 2026 borrowing suggests governments remain willing to accept those costs. By mid-August, more than 10 low- and middle-income countries had already surpassed their total international bond issuance for all of 2025, while several others had returned to the market. The persistence of demand indicates how important bond financing has become even when its price remains elevated.

The change in financing flows nevertheless provides some relief from the severe outflow pattern of recent years. Long-term debt flows shifted from a net outflow of $118 billion in 2024 to a net inflow of $45 billion in 2025. Even so, the longer view is less reassuring: between 2022 and 2025, developing countries paid $436 billion more in debt service than they received through new financing.

Debt service itself continued rising. Low- and middle-income countries paid $1.4 trillion in principal and interest in 2025, up 1.9% and marking a fifth consecutive annual increase. Payments to bondholders reached $363 billion, partly because new bond issues were used to finance buybacks and prepayments, illustrating how new borrowing can circulate back to creditors rather than expand governments' spending capacity.

The poorest borrowers face the steepest price for market access

Pressure is most visible among countries eligible for concessional financing from the World Bank Group's International Development Association. Their external debt grew 8.1% to $1.3 trillion in 2025, considerably faster than the overall increase across developing economies. Their borrowing costs were also far higher than those faced by stronger borrowers.

IDA-eligible countries paid an average interest rate of 8.2% on new commitments from private creditors, the highest rate since 1989. New bonds were even more expensive, carrying an average rate of 9.4%. Greater access to private finance thus arrived with repayment obligations capable of absorbing substantially more public resources over time.

The widening gap between official and commercial financing reinforces the divide. The difference between rates charged by official and private creditors to IDA-eligible countries increased from 3.4 percentage points in 2016 to 5.5 percentage points in 2025. Private markets may be providing financing when governments need it, but they are charging a much larger premium than concessional lenders.

Countries eligible only for non-concessional financing from the International Bank for Reconstruction and Development faced a different trajectory. Their average rate on newly issued bonds fell to 5.5% in 2025 from 5.8% a year earlier. The contrast shows that the reopening of international markets has not produced a uniform recovery in financing conditions; countries with greater vulnerabilities are paying substantially more for the same basic privilege of accessing capital.

High borrowing costs create a particularly difficult trade-off for poorer economies because debt payments compete with spending on people and development. The World Bank warns that elevated debt burdens risk crowding out essential investments in the poorest countries. Access to finance can help governments avoid immediate repayment stress, but financing priced at historically high rates can also deepen the pressure on future budgets.

Currency movements reveal why headline debt numbers need careful reading

Borrowing alone does not explain the entire increase in recorded debt. More than one-quarter of the $303 billion rise in public and publicly guaranteed debt reflected the weaker US dollar, which increased the dollar value of liabilities denominated in other currencies. Reported debt therefore rose partly because of exchange-rate valuation rather than fresh borrowing.

For several of the largest concessional borrowers, the currency effect was larger than the amount of principal they repaid during 2025. Their debt stock consequently appeared higher even though they continued servicing existing obligations. The pattern complicates any simple reading of rising debt totals as evidence of equivalent increases in new borrowing.

The broader picture is therefore defined by two developments moving in opposite directions. International finance has become more accessible, and long-term flows returned to positive territory in 2025, reducing some of the financing strain visible a year earlier. At the same time, debt service remains enormous, private-credit costs are exceptionally high for the poorest borrowers, and refinancing often replaces old liabilities with new ones rather than reducing them.