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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.
$105,000. That’s the cost of citizenship of Nauru, an island nation spanning just 21 square kilometres in the southwest Pacific Ocean. The low-lying island is issuing “golden passports” with the aim of raising money to fund climate action.
Nauru is the world’s third smallest country and its contribution to global greenhouse gases is estimated to be 0.01 per cent. Yet, it faces an existential threat from rising sea levels, storm surges and coastal erosion as the planet warms.
The government says it lacks the resources to protect itself from climate crisis and that selling citizenship will help raise the funds needed for a plan to move 90 per cent of the island’s 12,500-strong population onto higher ground and build an entirely new community.
Nauru’s “golden passport” initiative highlights the dual threats faced by many developing countries, home to 80 per cent of the global population. Amid the escalating climate crisis, these countries are grappling with severe economic and financial hardships. This is making them dependent on borrowings from foreign countries, creating a vicious circle that hinders ability to invest in climate resilience, adaptation and low-carbon transition, and is forcing the countries to borrow further for disaster recovery, mounting their debt burden.
This can have dire consequences at a time when the United Nations Conference on Trade and Development (UNCTAD), in a 2024 report, warned that the global public debt stock — money borrowed by governments worldwide, from within their country or from abroad — has reached record levels of $97 trillion in 2023. It means that the average income of an individual in the world has grown by 22 per cent to $13,065 between 2013 and 2023. However, the person’s share in the global debt has increased by an astounding 61 per cent during the period, reaching $12,034.
This unequal growth between public debt per capita and gross national income per capita is troubling, because it means that a significant portion of income is likely to be spent on debt repayment, leaving little room for financing developmental and climate priorities in line with countries’ nationally determined contributions (NDC) to reduce greenhouse gas emissions and adapt to climate change impacts.
While the climate finance needs of a citizen of the developing world (low- and middle-income countries excluding China) stand at about $488 annually till 2030, developing countries are also often the most vulnerable to climate change impacts and will require the lion’s share of increased investment for climate action.
This reality has grave implications when examined against the current political headwinds, particularly with respect to aid cuts and reduced international cooperation from the developed world. The US’ withdrawal from the Paris Agreement has weakened global climate action. The outcome of the New Collective Quantified Goal (NCQG) on climate finance at the 29th Conference of the Parties to the UN Framework Convention on Climate Change (COP29) in Baku, Azerbaijan, in 2024 has been a failure, especially for developing countries seeking climate justice through public finance.
Meanwhile, international financial institutions are quietly stepping away from Net Zero alliances and scaling back climate pledges. Major donors, including the United States, United Kingdom, Belgium, France, Netherlands and Sweden, are slashing their foreign aid budgets, implying a possible 22 per cent decrease in foreign aid (relative to 2023 levels) in the coming year, according to the report A generational shift: The future of foreign aid released by global management consultancy McKinsey and Company in May 2025.
To add to this, public climate finance from developed nations continues to fall short. For much of the Global South, the financial landscape for development and climate looks bleak. One crucial piece of this stalled progress is the growing external debt crisis (or borrowing to repay the debt).
The focus is now on FfD4, scheduled for June 30-July 3, 2025, which will, among other things, address the critical issue of debt in the context of global development. The conference is expected to focus on international financing for the Sustainable Development Goals (SDG), with a focus on reforming the global financial architecture, and advancing climate financing for developing countries, while recognising their unique needs, circumstances and capacities.
Sovereign debt or public debt, as the International Monetary Fund (IMF) describes it, refers to borrowings by governments to confront hardships and invest in public goods and services that support development, such as education, healthcare and energy systems, complementing revenues raised through general taxation.
The governments may borrow from within their country or from abroad, with creditors ranging from local private institutions and house-holds to other countries, development banks or multilateral institutions, and private investors. Governments can also “guarantee” debt for private entities, taking on the obligation to repay the loan if the debtor is unable to. Such publicly guaranteed debt is used strategically by governments to lower costs for investments that support their policy objectives.
“Public debt can be a powerful tool for development, enabling governments to finance critical expenditures and invest in a better future for their people,” said the 2024 report by UNCTAD A world of debt: A growing burden to global prosperity. However, when public debt grows excessively or rapidly, it becomes a heavy burden, particularly for developing countries.
The report said that there has been an alarming surge in global public debt, and that it has been driven by “cascading crises in recent years as well as the sluggish and uneven performance of global economy”. In 2023, global public debt reached a record level of $97 trillion — up by a notable $5.6 trillion from the previous year. However, this growth is marked by significant disparities among different economic blocs.
Though developed economies account for two-thirds of the global public debt, developing countries, also categorised as low- and middle-income countries (LMIC) by the World Bank, are contending with a staggering $29 trillion in public debt.
A significant chunk of this public debt stock of developing countries is external — borrowed from foreign creditors. It acts as a silent storm, eating into the country’s foreign-exchange reserves and increasing its vulnerability to economic shocks, such as currency fluctuations when the domestic currency weakens against the currency of debt.
If the country’s ability to repay the debt to foreign creditors in foreign currency is compromised, external debt can even lead to economic crises. Countries like Sri Lanka and Kenya have already experienced such fallout, with unsustainable external debt levels fuelling economic crises and civil unrest.
According to an analysis What broke the pearl of the Indian Ocean? published in the Journal of Financial Stability in February 2024, the key crisis in Sri Lanka was large budget deficits financed through foreign borrowings, causing external debt to rise to almost 50 per cent of the central government debt by 2018 — the highest in 20 years.
In 2020, when the COVID-19 pandemic gripped the world, the country experienced a sudden stop in capital flows. Unable to borrow money from abroad to service foreign debt, the country used its foreign-exchange (FX) reserves to finance the current account deficit. With the continued loss of FX reserves, Sri Lanka eventually defaulted on its external debt in April 2022. The entire economy, and country, came to a screeching halt with ensuing socioeconomic and political turmoil.
World Bank data showed similar unsettling patterns for many other developing countries. Between 2013 and 2023, developing countries’ dependence on external debt increased by 55 per cent — from $5.71 trillion to $8.84 trillion. Further analysis showed that the countries’ external debt stock is mounting at a rate higher than their gross national income (GNI), which grew at 52 per cent during the 10-year period. A majority of these borrowings from foreign creditors are by the public sector bodies in developing economies, which indicates that the borrowed money is being used to fill important budgetary gaps.
An assessment of total external debt stock-to-GNI ratio, which indicates the share of debt in a country’s income and the government’s capacity to repay the debt, showed that in 2023, the ratio stood at 36.44 per cent for low-income countries and 24.06 per cent for middle-income countries. The number of low- and middle-income countries (LMIC) whose external debt liabilities exceeded 50 per cent of gni, almost doubled, growing from 36 to 52 between 2013 and 2023.
For instance, Mozambique’s external debt in 2023 was 350 per cent of its GNI — the highest among all LMICs. Similarly, Mongolia’s external debt was 189 per cent of its GNI and Mauritius’ was 128 per cent of its GNI. Such high levels of external debt increase repayment pressure and can push countries towards economic crises.
A regional analysis shows the Asia and Pacific region has consistently borne the highest government-owned external debt stocks over the past decade within the Global South. Between 2013 and 2023, the region’s government-owned external debt stocks almost doubled — from $829 billion to $1.63 trillion.
Even if one excludes China from the analysis — which has, by far, the highest public debt in the world after the US and also a major creditor — the debt stock increases by 1.7 times, from $676.7 billion to $1.16 trillion. Sovereign debt stock of Latin America and Caribbean rose by 1.6 times from $574 billion to $940 billion. In Africa, sovereign debt stocks doubled, reaching $689 billion in 2023. More countries now face high debt burdens, especially in Africa.
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.