For much of the past decade, developing countries have seen their borrowing costs rise steadily, leaving less money for essential public services and investments. According to the United Nations Conference on Trade and Development (UNCTAD), between 2018 and 2024, 99 developing countries—equivalent to 73 percent of all developing nations—experienced a reduction in fiscal space as debt servicing absorbed a growing share of government revenues. This trend has left governments increasingly constrained, with schools, hospitals, and climate initiatives squeezed by the rising cost of debt.
The shift toward private credit following the global financial crisis initially offered developing countries access to abundant and relatively affordable funding. At the time, borrowing from commercial banks and private investors appeared attractive, supporting economic growth and infrastructure investment. However, reliance on private debt has left countries more vulnerable to global financial shocks. From 2022, central banks in developed economies raised policy interest rates to control inflation, a move that rippled across the globe. The resulting surge in borrowing costs has affected not only private credit but also loans from multilateral development banks, leaving developing countries paying far more to service existing debt.
The consequences are visible in public finances. As debt service claims an ever-larger slice of government revenue, less remains for critical development spending. In some countries, debt payments have risen by more than 25 percent relative to government revenue, forcing governments to make difficult choices between honoring financial obligations and funding social programs. Education, healthcare, and infrastructure projects are among the areas most affected, while investments in climate adaptation and mitigation are increasingly deferred.
Higher borrowing costs have also weakened debt sustainability. In September 2025, nearly half of the countries eligible for concessional financing from the International Monetary Fund (IMF) were classified as either in debt distress or at high risk of it. Many of these cases reflect liquidity pressures rather than insolvency—governments can struggle to meet short-term obligations even when their long-term debts are technically manageable. Yet for countries with weak growth prospects and limited access to emergency financing, liquidity squeezes can harden into full-blown crises. UNCTAD notes that three-quarters of the countries deemed by the IMF and World Bank to be in debt distress or at high risk of it in September 2025 had been in that position since at least 2018, underscoring the persistent nature of the challenge.
The human cost of these fiscal pressures is significant. With rising debt service, governments are forced to curtail social spending, meaning fewer resources for hospitals, schools, and essential services. Development goals—from improving literacy and healthcare access to combating climate change—are increasingly deferred or abandoned. In effect, countries are being forced to default not on their debts but on their development ambitions, with long-term implications for poverty reduction, economic growth, and social stability.
Experts argue that better debt management could offer some relief. UNCTAD’s new Debt Management and Financial Analysis System, DMFAS 7, introduced in 2025, is designed to improve the quality and timeliness of public debt data. By enabling governments to track liabilities more accurately, identify risks earlier, and respond more quickly to emerging pressures, digital debt management systems can support stronger decision-making and enhance creditor confidence. More accurate data and transparent reporting can reduce the risk premiums that lenders charge, potentially lowering borrowing costs and freeing up fiscal space.
Governments are also exploring greater coordination among borrowers to improve debt sustainability. The forthcoming Borrowers’ Platform, to be launched during the IMF and World Bank Spring Meetings in April 2026 in Washington, DC, aims to facilitate knowledge-sharing, enhance capacity building, and strengthen international financial architecture. By learning from each other’s experiences and pooling expertise, countries hope to navigate the rising cost of debt more effectively.
Despite these efforts, the broader trend remains worrying. As borrowing costs climb and fiscal space shrinks, developing countries face the stark reality that finance is not only a matter of numbers—it directly affects people’s lives. Projects that could improve health outcomes, expand education, and mitigate climate risks are postponed, while constrained budgets limit governments’ ability to respond to crises and invest in future growth.
The situation also exposes structural vulnerabilities in the global financial system. Many developing countries lack access to robust financial safety nets and are highly sensitive to interest rate movements in developed economies. As a result, they are disproportionately affected by global monetary tightening and market volatility. The combined effect of rising debt costs, limited fiscal space, and weak access to emergency financing reinforces cycles of vulnerability, leaving countries exposed to economic shocks and long-term developmental setbacks.
Ultimately, the challenge for developing nations is not merely to manage their debts but to reconcile financial obligations with pressing development needs. Rising interest rates, while often framed as a technical financial issue, have tangible consequences for millions of people, affecting education, healthcare, energy access, and climate resilience. Without coordinated international support and stronger debt management systems, the risk is that short-term liquidity pressures could evolve into chronic developmental crises, undermining progress achieved over decades.
The UNCTAD data paints a sobering picture: 73 percent of developing countries have seen shrinking fiscal space over the past six years, and there is no immediate relief in sight. While digital systems and coordinated initiatives like the Borrowers’ Platform offer tools to mitigate the pressures, the underlying challenge remains structural. Developing countries must balance debt obligations against urgent public needs, navigating a tightening global financial landscape that leaves little room for error. The stakes are high—not only for national economies but for the social and environmental well-being of millions of people across the developing world.
As borrowing costs continue to rise, governments face a stark choice: prioritize debt repayment or development. The decisions made today will shape not only fiscal health but the trajectory of education, healthcare, and climate action in the years to come. In an era of rising global interest rates and tightening financial conditions, the human cost of debt is becoming increasingly clear.
