Developing countries face a convergence of debt challenges in 2025. While widening debt sustainability vulnerabilities in low-income countries, least developed countries and African economies were evident in 2024, these risks may worsen across the developing world in 2025, reaching even emerging market economies that have shown resilience in the past few years.
Major policy shifts and escalating geopolitical tensions are undermining the multilateral trading system, tightening global financial conditions and straining official development assistance. These developments are impacting developing countries through trade and financial channels, diminishing their capacity to earn foreign exchange, generate government revenues and pursue sustainable development.
Although the aggregate projected debt service on external debt of middle- and low-income developing countries is 17% lower in 2025 compared with 2024, at $923 billion it remains a significant challenge to honour and refinance in the context of shrinking payment capacity in foreign and domestic currencies, rising borrowing costs and currency depreciation pressures. For several developing country groupings the share of government revenue and export earnings absorbed by debt servicing continues to rise (see sections II.A and B below).
The deteriorating trade landscape resulting from recent policy decisions by major economies is curbing economic growth prospects, lowering projections by around 0.5 percentage points, to between 2.3 and 2.8 %, since January 2025. The slowdown is expected to be broad-based across the developing world, undermining government revenues, potentially stalling or reversing policy rate cuts to curb currency depreciation pressures and raising domestic borrowing costs. Furthermore, falling commodity prices and a possible decline in world merchandise trade of 1.5% in 2025 will erode foreign exchange earnings, disproportionately affecting the poorest and smallest developing economies. The effect on inflation remains uncertain as lower commodity prices and subdued growth could compensate for those pressures.
Rising yields on United States Treasury securities have increased the cost of financing for developing countries engaged in global capital markets. Frontier market economies have been at the forefront, with their average bond spreads widening 3.5 times more than the average for emerging market economies. However, issuance of external sovereign bonds by these economies, which are also negatively impacted by the current developments, may also be threatened if financial conditions continue to tighten. According to estimates of the International Monetary Fund (IMF), capital outflows from emerging markets could reach between 1.6 to 1.9% of gross domestic product (GDP) up to the end of 2025 after a period of tepid portfolio flows to local currency bond markets. Countries with large financing needs and interest expenses will be hit the hardest.
For poorer and more vulnerable economies that rely on international development cooperation, a projected 20% contraction of official development assistance in 2025 will limit investment in development priorities and push more countries to debt distress. According to the joint Debt Sustainability Framework of IMF and the World Bank, 35 out of 68 of the countries eligible for the Poverty Reduction and Growth Trust were at high risk of or in debt distress in March 2025, almost the same as the number recorded in 2022, the historical peak (37 countries)