In recent years, discussions around debt in low- and middle-income countries (LMICs) have often been framed by narratives suggesting that debt challenges stem primarily from excessive borrowing or ineffective policies. While these perspectives reflect real and important concerns, the latest evidence from the International Debt Report (IDR) 2025 points to a more nuanced picture.
Across 120 LMICs, the data show how global financial tightening, exchange-rate movements, changing financing strategies, and shifting creditor structures have reshaped debt dynamics. Rather than a single story of policy failure, what emerges is a system under strain from cyclical shocks and a more complex global debt architecture.
This blog revisits four key dimensions of current debt pressures, offering a broader lens through which to understand the challenges ahead.
1. Debt levels alone tell you whether a country is in trouble: Oversimplification!
Debt risks are often assessed by how much countries borrow, yet recent developments suggest the cost of servicing debt has become a key driver of pressure across LMICs.
Between 2022 and 2024, major central banks implemented the fastest monetary tightening cycle in more than four decades, raising benchmark interest rates by over 500 basis points. For many LMICs, this translated into a sharp increase in borrowing costs. Interest payments reached an estimated US$415 billion in 2024, more than 2.4 times their level a decade earlier. In low-income countries, interest payments accounted for over half of total external debt service.
Importantly, rising debt-service burdens occurred even where debt stocks remained broadly stable. External debt growth slowed markedly, with total LMIC external debt increasing by only 1.1 percent in 2024, compared with annual growth rates of over 5–8 percent during much of the 2010s. As financing costs increased, many countries curtailed new borrowing and focused instead on managing existing liabilities.
Exchange-rate movements further amplified these pressures. Since 2017, many LMIC currencies have depreciated significantly against the U.S. dollar. Because a large share of external liabilities is denominated in foreign currency, these depreciations increased the local-currency value of debt service even without additional borrowing. Indexed exchange rates across 89 LMICs show a broad upward shift, with one-quarter of countries experiencing currency depreciations exceeding 40 percent against the US dollar since 2017.
2. Liquidity pressures mean solvency risks: Misleading!
Beyond rising borrowing costs, financing conditions shifted in ways that tightened countries’ liquidity positions. Between 2022 and 2024, low- and middle-income countries experienced an estimated US$741 billion in net financial outflows, the largest negative transfer recorded in more than five decades of international debt statistics. Rather than reflecting an expansion of borrowing, these flows point to a period in which global liquidity tightened, and financing became more constrained across many economies.
These dynamics increasingly blur the distinction between liquidity and solvency risks, as higher interest costs and weaker capital inflows create refinancing pressures even where debt stocks remain moderate.
These liquidity pressures have translated directly into tighter fiscal conditions. Interest payments alone now account for roughly 20–40 percent of government revenues in many countries. Among 89 LMICs, 21 countries spent more than 20 percent of revenues on interest payments in 2024, compared with only 9 countries in 2017. In 2024, 14 countries exceeded the 25-percent threshold and 33 exceeded 15 percent, underscoring how widely fiscal pressures have intensified. These fiscal pressures also carry broader development implications, as rising debt-service burdens are increasingly associated with lower living standards and heightened vulnerabilities across LMICs.
3. Turning to bonds and domestic markets means lower risk: Uncertain!
Against this backdrop of sustained liquidity and fiscal pressure, many governments adjusted their financing strategies as an effort to mitigate refinancing challenges and preserve market access.
Although international bond markets began to reopen in 2024 after a period of limited issuance, with bond flows shifting from net outflows of about US$75 billion in 2023 to net inflows of US$55 billion in 2024, the cost of tapping external market remains substantially higher than in the previous decade. Where pre-2020 Eurobonds often carried coupons around 4–6 percent, many LMIC issuers now face rates closer to 8–10 percent, with shorter maturities and higher risk premiums. In frontier markets, refinancing operations have often occurred at double-digit yields, increasing rollover risks.
Among economies eligible for financing from the International Development Association (IDA), which are considered by the World Bank as the ones with the lowest levels of income, bondholders have become the fastest-growing group of public and publicly guaranteed (PPG) creditors, making a shift from the concessional-finance-dominated landscape of the past.
As external borrowing has become more costly, governments have turned more heavily on domestic financing to meet their budgetary needs. Domestic debt has grown faster than external debt in many LMICs, supporting financing continuity but introducing new macro financial vulnerabilities. Local-currency bond yields have risen across several markets, and shorter maturities — often two to five years — forces governments into more frequent refinancing cycles, amplifying exposure to sudden changes in domestic liquidity conditions.
The increasing reliance on domestic markets has deepened the interconnectedness between sovereign and domestic financial institutions. Domestic banks hold a substantial share of government securities in many LMICs, while heavier public borrowing has coincided with slower private-sector credit growth in some economies, pointing to potential crowding-out pressures.
4. Debt restructuring through transparency lenses: A step in the right direction!
In the early 2000s, Paris Club creditors held nearly half of IDA PPG debt. Today, their share has fallen to around 10 percent, while China and other non-Paris Club bilateral creditors hold a much larger share. And private bondholders account for nearly 60 percent of long-term PPG external debt. Rather than signaling a breakdown in restructuring processes, this shift highlights the increasing importance of transparency and coordination across a more diverse creditor landscape.
The IDR 2025 shows that progress on debt transparency has accelerated in recent years. Improvements in disclosure, reporting standards, and data reconciliation between borrowers and creditors have reduced information gaps and strengthened confidence in debt statistics. Initiatives such as expanded reporting to the Debtor Reporting System and enhanced data-sharing exercises are helping align creditor and debtor records, making debt positions more visible and comparable across countries.
In this context, transparency is no longer only a technical issue. It is a core component of how modern restructuring frameworks operate. As creditor participation broadens and financial instruments diversify, consistent standards, timely reporting, and wider coverage of debt liabilities will play a central role in supporting coordination and reducing uncertainty in future debt workouts.
Taken together, these four dimensions indicate that debt dynamics in LMICs are being reshaped not only by rising borrowing needs but also by persistently higher financing costs, tightening liquidity conditions, a shifting creditor mix, and evolving transparency standards. Evidence from the IDR 2025 points to a debt landscape no longer defined by a single crisis narrative but rather by the interplay between global financial cycles and deeper structural changes in the debt architecture.