External debt owed by low- and middle-income countries rose by 5.5 per cent in 2025 to a record $9.4 trillion, marking the sharpest annual increase since 2021, according to the World Bank’s latest International Debt Report.
The increase came as borrowing costs remained at their highest levels in decades, intensifying pressure on national budgets despite a gradual return of poorer countries to international capital markets. The growing liabilities owed to foreign creditors have forced many governments to borrow again to repay existing debts, often at higher interest rates.
The World Bank warned that mounting debt-servicing costs were reducing the resources available for long-term development. In poorer countries in particular, payments to creditors risk displacing urgently needed public investment in education, healthcare and infrastructure.
Private lenders have increasingly returned to financing developing economies, particularly through the issuance of bonds by public-sector borrowers. According to the report, the volume of such bond issuance increased by more than a third to $251 billion in 2025, its highest level in five years.
Haishan Fu, the World Bank’s director of development data, welcomed the renewed growth in private-sector lending but cautioned that the additional financing was leaving many countries with less money available for long-term development.
The scale of the financial burden is reflected in the amount governments spent servicing their external debts. Low- and middle-income countries collectively paid approximately $1.4 trillion in interest and principal repayments in 2025, marking the fifth consecutive annual increase in debt-servicing expenditure.
Although access to international financial markets has improved for even the poorest countries, the cost of obtaining financing remains a major constraint. Rising global capital market interest rates have made it increasingly difficult for governments to secure loans on more favourable terms, adding to the pressure on already stretched public finances.
The continued dependence on new borrowing to meet existing repayment obligations has become a particular concern. Governments facing large debt repayments must seek additional financing, frequently under less favourable conditions than those attached to earlier loans. This can increase the overall cost of borrowing and further restrict the funds available for domestic development programmes.
The pressure has continued into 2026, with demand for new financing remaining high. By mid-August, more than 10 countries had already issued a greater volume of bonds than they had during the whole of 2025, indicating sustained reliance on international capital markets.
The World Bank’s findings point to a widening financial challenge for developing economies: while renewed access to private financing offers governments opportunities to raise funds, the high cost of borrowing and rising repayment obligations are limiting their capacity to direct public resources towards long-term economic and social priorities.
