Emerging-Market Debt at a Turning Point
Left panel: Total external debt stock of low- and middle-income countries (LMICs) climbed from US$ 5.7 trillion in 2013 to a record US$ 8.8 trillion in 2023, despite a brief pandemic-era dip in 2022.
Centre panel: In 2023 debt-service outlays reached US$ 971 billion; principal repayments (US$ 699 bn) absorbed more than twice the amount spent on interest (US$ 272 bn).
Right panel: The creditor mix shifted markedly over the decade: multilateral claims rose from 17 % to 20 % of long-term debt, bilateral exposure fell, while private-sector lenders—chiefly bondholders—still account for just over half of the total.
Systemic Warning Lights
On 25 April 2025 the World Bank’s chief economist cautioned that “more than half of 150 developing economies are already in—or perilously close to—debt distress.” Net interest payments across the group have doubled in a decade, climbing from 7 % of GDP in 2014 to roughly 12 % in 2024—levels not seen since the late-1990s crises. Rising U.S. rates, a firm dollar and volatile exports have tightened external financing just as social needs are growing.
The Bill Comes Due
The headline numbers are stark. Developing countries paid a record US$1.4 trillion to service external public debt in 2023, up almost one-third year-on-year; interest alone soared to US$406 billion. The 2022 out-turn had already been an all-time high at US$443.5 billion. This diversion of resources is crowding out investment in growth and human capital at precisely the moment it is most needed.
Who Gets Paid First?
Debt composition makes restructuring harder. By end-2021, 61 % of the public and publicly guaranteed (PPG) external debt of low- and middle-income countries (LMICs) was owed to private creditors, up 15 percentage points since 2010—leaving traditional Paris-Club frameworks less effective. China is now the single-largest bilateral lender, accounting for the bulk of non-Paris-Club exposure. That creditor mix fragments negotiations, prolongs standstills and sustains high risk premia.
Africa’s Squeeze
Sub-Saharan Africa illustrates the depth of the dilemma. Interest and principal consumed 14.8 % of the region’s export receipts in 2023, more than triple the 2011 share. Eleven of the world’s 20 fastest-growing economies are African, yet growth for 2025 has been marked down to 3.8 % as nations such as Kenya shoulder double-digit effective borrowing costs. The IMF urges higher domestic revenue mobilisation, but fiscal space is evaporating faster than governments can broaden tax bases.
Latin America’s Fiscal Bind
Latin America and the Caribbean now devote an average 35.1 % of government revenue to debt service, dwarfing new capital spending. A 7 % slide in global commodity prices last year squeezed exporters’ fiscal balances by roughly two percentage points of GDP, pushing several sovereigns back to primary deficits and worsening rollover risk. The region’s hard-currency bonds consequently trade at spreads wide enough to shut several frontier issuers out of markets.
South Asia’s High-Debt Normal
South Asia’s public-debt-to-GDP ratio averaged 86 % in 2023—the highest among emerging-market regions—yet only half of the economies have entered formal restructuring. Afghanistan, Maldives, Pakistan and Sri Lanka are in distress; others rely on large domestic banking systems to absorb sovereign paper, but at a cost to private-sector credit. The tension between fiscal dominance and development remains acute.
The Social Opportunity Cost
UNCTAD finds that 3.3 billion people live in countries spending more on interest than on health or education. Between 2010–12 and 2020–22 the count of nations allocating more to interest than to primary schooling jumped from 12 to 34; for health, from 15 to 46. In 2023 alone, 54 developing states—nearly half in Africa—dedicated at least 10 % of their entire budgets just to interest payments. The development “default” is already under way even where formal sovereign default has been avoided.
Tighter Global Financial Conditions
The April 2025 IMF Global Financial Stability Report underscores that emerging economies now face “the highest real financing costs in a decade,” with investor concern centred on highly-indebted sovereigns. Dollar liquidity strains remain visible in cross-currency swap markets, while foreign direct investment—once 5 % of EM GDP in good times—has sagged, further curtailing external funding.
Reform and Restructuring Efforts
Progress under the G20 Common Framework has been slow but not negligible: Zambia completed its bond exchange in June 2024 and is advancing bilateral memoranda; Ghana and Ethiopia are negotiating similar deals, while Sri Lanka and Suriname restructure outside the framework. Recognising the hold-out problem with commercial creditors governed by English law, eight African nations last week urged the UK Parliament to pass a bill preventing litigation during restructurings. Whether that succeeds could materially alter bargaining dynamics.
Policy Priorities
A comprehensive response is urgent. Multilaterals can expand concessional financing tied to climate and SDG outcomes; debt-for-nature or debt-for-climate swaps could redirect servicing flows into resilience investment. Emerging-market governments, meanwhile, must rebuild fiscal space by broadening tax bases (notably VAT and property taxes) and strengthening debt-management transparency to reduce risk premia. For official creditors, accelerating Common Framework timelines, mandating comparable treatment across creditor classes and endorsing majority-vote collective-action clauses for all external bonds would shorten standstills and lower cumulative costs. Finally, advanced-economy central banks should calibrate balance-sheet run-offs to avoid undue spill-overs; the marginal welfare gain at home may be outweighed by development losses abroad. Without a concerted package, the arithmetic is simple: servicing will continue to crowd out schooling, clinics and climate adaptation—and a cascade of outright defaults will become only a matter of time.