Developing nations' external debt nears $9.4 trillion as borrowing costs surge, raising stability fears

The external debt of developing economies surged to a record $9.4 trillion in 2025, the World Bank reported, as borrowing by low- and middle-income countries accelerated at the fastest pace in four years, raising fresh concerns about financial stability in the world's most vulnerable nations.

The 5.5% increase — the sharpest since 2021 — was driven by a recovery in bond issuances, a weaker U.S. dollar and renewed appetite among private investors for lending to developing markets, according to the World Bank's International Debt Report 2026. But the return of private capital came with steep costs: the poorest countries faced some of the highest borrowing costs in decades, and debt-service payments climbed for the fifth consecutive year.

The global figures were underscored by stark national examples. Pakistan's external debt nearly doubled over the past decade, reaching $135.1 billion in 2025 from $68.7 billion in 2015, according to the World Bank data. The increase was led by public and publicly guaranteed borrowing, which accounted for $107.1 billion of the total. Private non-guaranteed debt stood at $17.6 billion, while short-term debt added $10.5 billion.

Among individual creditors, China held the largest exposure to Pakistan at $22.4 billion, followed by the World Bank with $19.2 billion and the Asian Development Bank with $16.8 billion. Multilateral institutions collectively accounted for $56.8 billion of the public debt, while bilateral creditors were owed $42.4 billion. Private creditors held $7.8 billion.

The terms of borrowing varied sharply by lender. Loans from official creditors carried an average interest rate of 3.6% with a 16-year maturity and a four-year grace period. Private borrowing was considerably more expensive, with an average interest rate of 8.6%, a three-year repayment period and a one-year grace period, the World Bank report showed.

During 2025, Pakistan received financial support from key lenders. China extended maturities on $2 billion of its loans, while the International Monetary Fund disbursed $2.3 billion under the Extended Fund Facility and Resilience and Sustainability Facility arrangements, aimed at supporting long-term economic stability.

The Middle East, North Africa, Afghanistan and Pakistan (Menap) region saw its external debt-to-gross national income ratio rise from 26.7% to 29.4% in 2025 — the biggest single-year increase among all regions, reflecting continued debt accumulation.

Nigeria's total external debt stock rose to about $145 billion in 2025, according to World Bank data reported by Anadolu Agency. The lender warned that rising borrowing costs are increasing financial pressure on developing economies and threatening spending on essential services.

Uzbekistan's external debt reached $88.03 billion at the end of 2025, up 24.7% over the year, according to the World Bank's International Debt Report 2026 as reported by kun.uz. Over the past decade, the country's debt to foreign creditors grew approximately 6.5 times from $13.57 billion in 2015.

The increase in borrowing was most pronounced among the world's poorest nations. Countries eligible for International Development Association (IDA) financing saw their external debt rise 8.1% to $1.3 trillion. Low-income countries recorded an even sharper increase, with external debt climbing 8.9% to $262.4 billion — the biggest jump since 2020.

The World Bank's report underscores a widening divergence: while stronger economic growth helped stabilise some debt ratios for middle-income countries, the poorest nations face a squeeze from higher borrowing costs and mounting repayment obligations. Net long-term debt transfers turned positive in 2025 after several years of outflows, but the burden of servicing existing debt continued to weigh on fiscal space.

The record $9.4 trillion in external debt for low- and middle-income countries marks a milestone in a decade-long buildup that has left many developing economies exposed to shifts in global interest rates and investor sentiment. With borrowing costs remaining elevated, analysts say the risk of debt distress in the most heavily indebted nations is likely to persist.