While the headlines of the global debt debate often center on high-income countries, a quieter but no less consequential crisis is unfolding across the developing world. In low- and middle-income countries (LMICs), mounting public debt is not a systemic risk to the global financial architecture, but it is fast becoming one of the gravest obstacles to human development, social progress, and economic resilience. The debt burden is choking fiscal space, diverting scarce resources away from critical investments in health, education, and climate adaptation, and eroding public trust in government.

A rising burden with limited return

Developing economies have seen a dramatic rise in public debt over the past decade. By the end of 2023, their combined public debt had reached $29 trillion—nearly 30% of global public debt, up from just 16% in 2010. This rapid accumulation has been driven by a mix of global shocks, including the COVID-19 pandemic, and a sharp increase in borrowing costs.

Yet, unlike in developed countries, where governments can often borrow at low interest rates and in their own currencies, many developing nations face punitive financing terms and currency risks. As a result, the same debt loads are vastly more burdensome. In Africa, for instance, average borrowing costs are nearly 10 times higher than those of the United States.

But this is not just a numbers game. The consequences of this debt burden are deeply human. A growing number of countries are being forced to choose between repaying creditors and investing in their people. One-third of developing countries now spend more on interest payments than they do on health, education, or climate action. In least developed countries, nearly 14% of domestic revenue is consumed by interest payments—leaving governments unable to meet even basic needs.

Debt is not just a macroeconomic concern—it is a moral and developmental one.

The development opportunity cost

This crowding-out effect is one of the most pernicious aspects of the debt crisis. The diversion of public funds from social investment to debt servicing undermines long-term development prospects and traps countries in cycles of fragility. Between 2010 and 2023, spending on interest payments in developing countries increased by 73%, while health and education spending rose by only 58% and 38%, respectively. In many countries, particularly in Africa and parts of Asia, governments have spent more per capita on debt interest than on healthcare—a pattern that is as alarming as it is unsustainable.

The impact of this squeeze is visible in deteriorating public services, underfunded infrastructure, and rising inequality. Poor and vulnerable communities bear the brunt, both because they rely most on public goods and because they are least able to absorb the consequences of regressive taxation or currency depreciation. Inflation, too, hits them hardest. Debt is thus not just a macroeconomic concern—it is a moral and developmental one.

A crisis of structure and incentives

The architecture of global finance also compounds these challenges. A large share of developing country debt is owed to private creditors, who typically offer shorter maturities and charge higher interest rates. In 2022, private creditors withdrew $89 billion more from developing countries than they disbursed, resulting in a negative net resource transfer. This effectively means that the world’s poorest are subsidizing global capital markets.

At the same time, international aid has become more loan-based and less concessional. The share of loans in official development assistance increased from 28% in 2012 to 34% in 2022. Meanwhile, resources for debt relief or restructuring efforts have dwindled—falling from over $4 billion to just $300 million in a decade. Even as many developing countries plead for restructuring or write-downs, the mechanisms for fair and timely resolution remain fragmented and inadequate.

Shared responsibility: putting fiscal houses in order

But not all the responsibility lies with external actors. Many developing countries must also confront the reality that domestic governance failures—particularly corruption, wasteful spending, and poor fiscal discipline—have contributed significantly to their debt burdens.

A powerful example dates back to 2001, when the IMF and World Bank announced Uganda’s participation in the Highly Indebted Poor Countries (HIPC) debt relief initiative. On the very same day, the Financial Times reported that Uganda’s President had spent an enormous sum to purchase a new presidential jet. This stark juxtaposition of international debt forgiveness and conspicuous state extravagance underscored a deeper concern: without a genuine commitment to transparency, accountability, and responsible public financial management, debt relief may simply enable a new cycle of unsustainable borrowing.

Governance reforms—improving tax systems, curbing illicit financial flows, eliminating unnecessary subsidies, and tackling corruption—are essential to creating fiscal space and public credibility. Countries that seek further debt relief must also demonstrate a commitment to managing their finances prudently and investing in their citizens’ future.

A fragile social contract

Rising debt levels are not just a budgetary issue—they pose a real risk to social cohesion and political stability. Public frustration is growing as people see vital services deteriorate while their governments are tied up in servicing creditors. Kenya offers a sobering warning. In 2024, mass protests erupted after the government proposed significant tax increases to address its spiralling debt crisis. With interest payments consuming over 60% of government revenues, the proposed fiscal measures triggered widespread anger, particularly among youth and urban workers.

In Sri Lanka, the debt crisis culminated in a decision to suspend external debt payments in 2022. The country’s foreign exchange reserves had fallen to less than $20 million, forcing the government to prioritize basic imports like fuel over its international obligations. The result was economic paralysis, deep political unrest, and a collapse of public trust.

These examples illustrate the broader danger: when debt erodes a state’s capacity to govern and provide, the social contract begins to unravel. Citizens lose confidence in institutions, and political instability follows close behind.

Toward a more balanced compact

Addressing the debt crisis in developing countries requires a rethinking of both global finance and domestic governance. On the international side, creditors—especially private ones—must be part of the solution. Mechanisms for orderly restructuring, more concessional financing, and multilateral coordination are essential. More innovative instruments such as debt-for-climate swaps or state-contingent debt should also be part of the toolbox.

But international solutions will only succeed if matched by domestic accountability. Governments must make hard choices, reform inefficient systems, and invest strategically in people and resilience. Debt relief, in this context, should be seen not as a handout, but as a second chance—a reprieve contingent on credible reform.

The upcoming UN Conference on Financing for Development, set to start next week, offers a timely and vital opportunity to reframe the debate. It must move beyond technical fixes to foster a new global compact—one rooted in responsibility, solidarity, and a shared commitment to sustainable development. Nearly half of humanity lives in countries where debt is crowding out hope. The time for decisive, coordinated action is now.