Borrowing Costs Bite: Developing Countries’ External Debt Hits Record $9.4 Trillion

Access to international finance improved, but expensive borrowing continued to put pressure on government budgets and essential investment in people.

Developing countries' external debt climbed 5.5% to a record $9.4 trillion in 2025, according to the World Bank Group's International Debt Report 2026. The increase was the fastest since 2021 and roughly four times the average growth recorded during 2022–24. Access to international finance improved, but expensive borrowing continued to put pressure on government budgets and essential investment in people.

Private creditors drove much of the rise, with renewed lending and stronger bond sales bringing more countries back into international markets. Bond issuance by public entities rose nearly 35% to $251 billion, reaching its highest level in five years. The recovery gave governments more opportunities to raise money, often at interest rates that added to their future repayment bills.

The sharpest debt growth came among countries eligible for concessional financing from the World Bank Group's International Development Association (IDA). Their external debt increased 8.1% to $1.3 trillion, leaving some of the most vulnerable economies with larger financial obligations. High debt burdens in these countries threaten to absorb money needed for education, healthcare and other investments that support development.

Returning to Bond Markets Comes at a Price

Many governments sold new bonds to buy back debt approaching maturity, spreading repayments over a more manageable schedule without substantially reducing the amount owed. These transactions often replaced existing debt with borrowing at higher interest rates, making the extra breathing room expensive. Early 2026 figures showed continued appetite for international bond financing despite those costs, with more than 10 countries exceeding their entire 2025 issuance by mid-August and several others returning to the market.

Haishan Fu, the World Bank Group's Chief Statistician and Director of Development Data, welcomed the return of private lending but warned that larger loans and higher payments could leave less money for development. Her concern reflects the difficult choices facing governments that need financing today and must protect spending that benefits their populations over many years. Fu said responsible debt management should give everyone, including future generations, a chance to thrive.

Poorest Borrowers Face the Highest Interest Rates

IDA-eligible countries paid an average interest rate of 8.2% on new commitments from private creditors in 2025, the highest level since 1989, and 9.4% on new bonds. The difference between their borrowing rates from official and private creditors widened to 5.5 percentage points, compared with 3.4 percentage points in 2016. Countries eligible only for non-concessional lending from the World Bank Group's International Bank for Reconstruction and Development (IBRD) paid an average of 5.5% on new bonds, down from 5.8% a year earlier.

Low- and middle-income countries spent $1.4 trillion on principal and interest payments in 2025, an increase of 1.9% that marked the fifth consecutive annual rise. Payments to bondholders reached $363 billion, partly because governments used proceeds from new bonds to fund buybacks and early repayments. Elevated global interest rates kept debt-service pressures severe, increasing the strain on budgets even as access to financing improved.

New Financing Recovers as Currency Changes Lift Debt Totals

Developing countries paid $436 billion more in debt service than they received in new financing over the four years from 2022 through 2025. Long-term debt flows changed direction in 2025, moving from a net outflow of $118 billion in 2024 to a net inflow of $45 billion. That recovery brought financing back into borrowing economies, leaving the accumulated drain from the preceding years unresolved.

Exchange-rate movements accounted for more than a quarter of the $303 billion increase in public and publicly guaranteed debt, as a weaker US dollar raised the dollar value of obligations denominated in other currencies. For several of the largest concessional borrowers, this currency effect exceeded the principal they repaid during 2025. Their reported debt rose despite continued repayments, showing that part of the increase reflected changes in currency values rather than additional borrowing.