Global Debt Hits Record US$9.4 Trillion as Developing Nations Face Rising Borrowing Costs

Private lenders return to emerging markets, but poorest nations struggle with soaring interest rates and mounting debt repayments

In a significant development in global finance, China extended the maturity of US$2 billion in loans to Pakistan in 2025, while the International Monetary Fund (IMF) provided US$2.3 billion in fresh financing under its Extended Fund Facility (EFF) and Resilience and Sustainability Facility (RSF) to strengthen the country’s long-term economic stability.

The developments came amid a sharp rise in borrowing across low- and middle-income countries (LMICs), whose external debt reached an unprecedented US$9.4 trillion in 2025, highlighting growing financial pressures on developing economies.

External Borrowing Surges to Record Levels

External debt among low- and middle-income countries increased by 5.5 per cent in 2025, representing the largest annual rise in four years. The surge was driven by increased bond issuance, a weaker US dollar and renewed investor confidence in lending to developing economies.

However, the return of private capital to international markets came at a considerable cost, particularly for the world’s poorest nations, which faced borrowing expenses at their highest levels in decades.

Debt-servicing obligations continued to rise for the fifth consecutive year. Despite this pressure, stronger economic growth helped stabilise certain debt ratios. After several years of net capital outflows, long-term debt transfers also turned positive.

Countries eligible for financing from the International Development Association (IDA) experienced an even sharper increase in external debt, which climbed by 8.1 per cent to US$1.3 trillion. Among low-income countries, external debt rose by 8.9 per cent to US$262.4 billion, the steepest increase since 2020.

The depreciation of the US dollar played a significant role in this expansion. Its declining value accounted for 28.2 per cent of the overall increase in external public and publicly guaranteed debt among LMICs during the year.

For several major countries borrowing on concessional terms, currency valuation changes effectively offset principal repayments made in 2025. In some cases, they also reversed part of the debt reduction achieved through repayments in 2024. As a result, outstanding debt remained elevated at the end of the year despite continued repayments.

Private Creditors Make a Strong Comeback

Private lending, which is particularly sensitive to financial market conditions, borrowing costs and borrowers’ creditworthiness, witnessed a substantial revival in 2025.

Outstanding claims held by private creditors against low- and middle-income countries increased by 5.2 per cent to US$5 trillion, compared with growth of just 0.6 per cent in 2024.

The increase was driven by higher lending from both bondholders and other private creditors, including commercial banks. Bondholders’ claims rose by 5.7 per cent to US$2.4 trillion, while claims held by other private creditors increased by 4.7 per cent to US$2.7 trillion.

LMIC economies recorded growth of 5.1 per cent, measured by Gross National Income (GNI). The stronger economic performance encouraged lenders to re-enter these markets, while several governments continued to borrow despite relatively high interest rates.

However, a major concern remains that countries with the least capacity to absorb additional debt are facing the highest borrowing costs.

Poorest Countries Face Highest Interest Rates

The growing dependence on private financing has made borrowing considerably more expensive for countries eligible for IDA assistance.

These countries paid an average interest rate of 8.2 per cent on new loans contracted in 2025, the highest level since the late 1980s.

The gap between interest rates charged by official and private creditors has also widened significantly over the past decade. It increased from 3.4 percentage points in 2016 to 5.5 percentage points in 2025, highlighting the growing cost disadvantage faced by developing nations dependent on private financing.

In contrast, borrowing conditions improved for countries receiving loans from the International Bank for Reconstruction and Development (IBRD). Their average interest rate on new loans declined to 5.5 per cent in 2025 from 5.8 per cent in the previous year.

Debt Repayments Reach US$1.4 Trillion

Despite the return of private investment and improved economic growth, debt servicing remains a major challenge for low- and middle-income economies.

Total debt-servicing payments increased for the fifth consecutive year, rising by 1.9 per cent to US$1.4 trillion in 2025.

Payments to private creditors were the principal driver of this increase. Debt repayments to bondholders alone surged by 13.7 per cent to US$363.1 billion, adding further pressure on developing countries’ public finances.

Between 2022 and 2025, low- and middle-income countries paid approximately US$436.1 billion more in debt repayments than they received through new financing, reflecting the scale of financial resources flowing out of developing economies.

However, the trend reversed in 2025 as long-term debt flows returned to positive territory. After recording net outflows of US$118.4 billion in 2024, LMICs registered net inflows of US$45.4 billion in 2025.

While the return of international lending offers some relief to developing economies, the combination of rising debt, expensive private financing and mounting repayment obligations continues to pose a serious challenge to their long-term economic stability.