As the fourth International Conference on Financing for Development (FfD4) kicks off in Seville, Spain, we look at how a massive debt burden on developing countries is holding them back. As an unfit global financial architecture makes accessing finance more difficult for countries in the developing world, governments are left with the option of either servicing the debt or serving the people. Read the first part.
Since 2010, sovereign debt in developing countries has grown twice as fast in developed economies — with its share in global total increasing to 30 per cent in 2023, from just 16 per cent in 2010.
But why are developing countries increasingly becoming debt-ridden? The answer to this question is often traced to the oil price rise of the 1970s, which resulted in a financial squeeze in oil-importing developing countries. Arab oil wealth was deposited in western bank vaults. These “petrodollars” provided much of the cash lent to borrowers in the developing world. This was also advantegeous to the Western economies. “Recycling” oil money to the developing world meant that they could keep buying western exports, despite bigger oil bills, and thus help keep numerous factories in Europe and North America open, staving off a descent into recession.
During the 1970s, private commercial banks in the West began to overtake official lenders. At the height of their lending in 1982, banks were lending $63 billion a year to the developing world, nearly twice the amount lent by official government sources. The economies of several borrowing countries grew rapidly during the 1970s.
But the 1980s saw a recession in industrialised countries. Economic activities slowed down and interest rates on bank loan went up. Developing countries which could not pay their earlier loans now had to take more and more loans just to pay interest on the loan they had taken. An example of this vicious debt trap is Brazil; between 1972 and 1988, the nation paid $176 billion as interest on a debt of $124 billion to industrialised countries.
Cut to the 2020s. The situation has not changed much in the past 40-odd years.
Developing countries spent a record $1.4 trillion to service their foreign debt as their interest costs climbed to a 20-year high in 2023, according to the World Bank’s International Debt Report released in December 2024. “Currently, more than half of develo-ping countries allocate at least 8 per cent of government revenues to interest payments, a figure that has doubled over the past decade. The rising pressure of interest payments is substantial across regions, particularly in Africa and Latin America and the Caribbean,” showed the United Nations Conference on Trade and Development’s (UNCTAD) A world of debt report.
In 2023, a record 54 developing countries, equivalent to 38 per cent of the total, allocated 10 per cent more of government revenues to interest payment, with nearly half of them in Africa. Developing countries’ interest payments are not only growing fast, but they are outpacing growth in critical public expenditures. In 2023, a report Beyond Climate Finance by Delhi-based think tank Centre for Science and Environment also highlighted that many low- and middle-income countries (LMIC) are spending more money on debt payments than what it will cost them to meet their climate goals.
The annual external debt service bill of governments in LMICs has doubled over the past decade, reaching $368 billion in 2023 from $182 billion in 2013 (‘Uncomfortably high’, p34). This becomes clearer still when one looks at the share of each dollar of gni earned by a country that goes towards external sovereign debt servicing. For one dollar of gni earned, the average developing economy spent 1.6 cents on external sovereign debt servicing in 2013, which rose to 2.5 cents in 2023. For LMICs, the figure increased from 1.8 cents in 2013 to 2.8 cents in 2023.
A key reason for such high debt servicing cost is the high interest being charged by creditors. The UNCTAD report showed that developing regions borrow at rates that are 2-4 times higher than those of the US and 6-12 times higher than those of Germany. “The burden of this debt varies significantly, with countries’ ability to repay it exacerbated by inequality embedded in the international financial architecture,” stated the report.
This is largely because developing countries are perceived to have a more “high-risk environment”, and thereby face higher cost of borrowing. Sovereign credit ratings are meant to be independent measures of a country’s ability to pay its debts. Such ratings are important because they determine the interest rates a country faces in the global financial market and, therefore, its borrowing costs. Unfortunately, sovereign credit ratings are negatively biased towards the Global South. The 2023 report by the United Nations Development Programme Reducing the Cost of Finance for Africa estimated that unequal country ratings have cost African states more than $24 billion in excess interest and over $46 billion in forgone lending.
For instance, Cameroon and Ethiopia’s credit ratings were slashed after they requested relief from the Debt Service Suspension Initiative (DSSI) — a G20 initiative launched in May 2020 to help eligible low- and lower-middle-income countries recover from the economic impact of the covid-19 pandemic. Instead, the rating downgrade increased the costs of Cameroon and Ethiopia’s debt, prolonging recovery by straining their budgets, explains Ramya Vijaya, professor of economics and global studies at Stockton University, US, in an interview with Danish Development Research Network in March 2025, on sovereign credit ratings and wider implica-
tions of unequal access to finance for developing countries. It is crucial to investigate the long-term effects of country ratings because they determine how much money governments — particularly Global South countries with lower tax revenues — can afford to spend on healthcare, education and other important areas for development, said Vijaya.
A report by the International Monetary Fund showed Global North countries averaged 12 per cent of gdp on pandemic-related spending. Numbers for emerging market and low-income economies were
6 per cent and 3 per cent of gdp respectively. Yet, emerging and developing states accounted for 95 per cent of sovereign rating downgrades in 2020.
This highlights how developed economies get additional leeway from rating agencies to ramp up spending or cut taxes during downturns to stimulate growth. Consequently, these countries can recover more quickly from crises. Global South nations, meanwhile, cannot increase government expenditure due to the threat of rating downgrades. Such procyclical policies tend to exacerbate debt problems.
It can be seen that Africa has had the highest rise in interest payments on sovereign debt, increasing by 3.2 times from $7.8 billion in 2013 to $25.1 billion in 2023. The Asia and Pacific region has seen a similar rise, with sovereign debt interest payments more than tripling in value from $20.9 billion in 2013 to $64.1 billion in 2023 — accounting for the highest share of interest paid in 2023 at 48.7 per cent. Latin America and the Caribbean, saw a slower rise in interest payments of 1.6 times.
This article was first published as part of the cover story Debt's climate link in the July 1-15, 2025 print edition of Down To Earth.