Developing countries’ external debt climbed to a record $9.4 trillion in 2025, according to the World Bank, as governments turned increasingly to private lenders and international bond markets while higher interest rates drove up the cost of servicing existing obligations.
The figure was disclosed in the bank’s International Debt Report 2026, released on Thursday. The report warns that rising borrowing costs and mounting debt-service obligations are placing growing pressure on public finances, with the poorest countries facing the sharpest strain.
Fastest Growth Since 2021
The increase represented the fastest pace of growth since 2021 and was roughly four times the average recorded between 2022 and 2024. External debt expanded most rapidly among countries eligible for concessional financing from the World Bank’s International Development Association (IDA), rising by 8.1 per cent to $1.3 trillion.
According to the report, external debt across developing countries jumped 5.5 per cent to the record $9.4 trillion, the fastest pace since 2021 and about four times the 2022–24 average.
Private creditors accounted for a significant share of the increase as international financial markets reopened to developing economies. Bond issuance by public entities increased by nearly 35 per cent to $251 billion, the highest level in five years.
World Bank Flags Pressure on Development Spending
Haishan Fu, World Bank Group Chief Statistician and Director of Development Data, described the return of private lending as welcome but noted that it comes with considerable financial pressure.
“The return of private lending to low- and middle-income countries is welcome, but these countries are borrowing more, paying more, and in many cases leaving less for long-term development,” Fu said.
She stressed the importance of responsible debt management to ensure that future generations also benefit from development opportunities.
Refinancing Offers Limited Relief
The report observed that many governments issued new bonds to refinance maturing debt and spread repayment obligations over longer periods. However, the strategy did little to reduce overall debt stocks and often came at higher interest rates.
The cost of borrowing was particularly severe for countries eligible for concessional financing. They paid an average interest rate of 8.2 per cent on new commitments from private creditors in 2025, the highest since 1989, while new bond issuances attracted an average rate of 9.4 per cent.
The gap between the interest rates these countries paid to official and private creditors widened from 3.4 percentage points in 2016 to 5.5 percentage points in 2025.
By comparison, countries eligible for non-concessional financing through the World Bank’s International Bank for Reconstruction and Development paid an average of 5.5 per cent on new bonds, down from 5.8 per cent in the previous year.
Debt Service Continues to Weigh on Economies
Beyond the higher cost of new borrowing, existing debt obligations continued to weigh on developing economies. Low- and middle-income countries paid $1.4 trillion in principal and interest in 2025, a 1.9 per cent increase and the fifth consecutive annual rise. Payments to bondholders climbed to $363 billion, partly reflecting debt buybacks and early repayments financed through new bond issues.
The pressure was also evident in the gap between new financing and repayments. Between 2022 and 2025, developing countries paid $436 billion more in debt service than they received in new financing, highlighting the resources diverted towards servicing existing obligations. However, the direction of long-term debt flows changed in 2025, turning from a net outflow of $45 billion.
Currency Movements Inflate Reported Debt
The World Bank also highlighted the effect of currency movements on reported debt levels. More than a quarter of the $303 billion increase in public and publicly guaranteed debt reflected the weakening of the US dollar, which raised the dollar value of debt denominated in other currencies.
For some of the largest concessional borrowers, currency effects exceeded the principal repayments made during the year, resulting in higher reported debt stocks despite continued debt servicing.
Meanwhile, early data for 2026 indicate that demand for international bond financing has remained strong despite elevated borrowing costs. By mid-August, more than 10 developing countries had already exceeded their total bond issuance for 2025, while several others had returned to international markets.
