By The South Asia Times

WASHINGTON - External debt in low- and middle-income countries surged 5.5 percent to a record $9.4 trillion in 2025, while governments paid a combined $1.4 trillion in principal and interest, highlighting growing financial pressures on developing economies, according to the World Bank’s International Debt Report 2026.

The increase in external debt was the fastest since 2021, with private creditors returning to developing-country markets and international bond issuance recovering after years of tighter financial conditions.

However, the World Bank warned that improved access to international financing has not translated into cheaper borrowing, particularly for the poorest countries, which face some of the highest financing costs in decades.

The report found that debt-service payments by low- and middle-income countries increased for a fifth consecutive year in 2025, rising 1.9 percent to $1.4 trillion.

Payments to bondholders alone reached $363.1 billion, reflecting increased borrowing costs as well as debt buybacks and early repayments financed through new bond issues.

Between 2022 and 2025, developing countries paid approximately $436 billion more in principal and interest than they received in new financing, putting additional pressure on government budgets and resources available for development.

- Poorest countries face highest borrowing costs

The report highlighted particularly difficult conditions for countries eligible for concessional financing from the World Bank's International Development Association (IDA).

Their external debt increased 8.1 percent to $1.3 trillion in 2025.

These countries paid an average interest rate of 8.2 percent on new commitments from private creditors, the highest level since 1989. The average interest rate on their new bond issues reached 9.4 percent.

By comparison, countries eligible for loans from the World Bank's International Bank for Reconstruction and Development (IBRD) paid an average 5.5 percent on new bonds.

The World Bank said the widening gap in borrowing costs reflects the disproportionately high financial burden facing poorer economies.

- Private creditors return to developing markets

Private-sector lending played a major role in the increase in external debt during 2025.

Public-sector bond issuance rose nearly 35 percent to $251 billion, reaching its highest level in five years as international markets reopened to more developing countries.

Many governments issued new bonds to repay maturing debt and spread repayment obligations over longer periods. However, the World Bank noted that such refinancing often came at higher interest rates without significantly reducing overall debt levels.

Demand for international borrowing continued into 2026. By mid-August, more than 10 countries had already exceeded their total bond issuance for the whole of 2025, while several others had returned to international financial markets.

- Debt pressures threaten development spending

The World Bank warned that rising debt-service costs could leave governments with fewer resources to invest in essential sectors, including education, healthcare, infrastructure and job creation.

The growing burden is particularly concerning for countries already facing limited fiscal space, economic vulnerabilities and substantial development needs.

World Bank Group Chief Statistician and Director of Development Data Haishan Fu said the return of private lending was welcome, but developing countries were borrowing more and paying more, leaving less money in many cases for long-term development.

- World Bank stresses debt transparency

The International Debt Report 2026 provides an analysis of external debt stocks and financial flows through the end of 2025, examines changing debt dynamics and their policy implications, and updates the international debt transparency agenda.

Drawing on data collected through its Debtor Reporting System, the World Bank has published external debt statistics and analysis for five decades.

The report, together with the International Debt Statistics database, tracks borrowing patterns, lending instruments and the impact of debt-relief initiatives while promoting better practices in debt recording and reporting.

The World Bank also maintains the IDS-DSSI database, which provides information on debt-service payments deferred by individual bilateral creditors and projected monthly payments owed to bilateral lenders.

The latest findings underline the challenge facing developing economies: although access to international finance is improving, the rising cost of borrowing and growing debt repayments continue to limit resources available for economic growth and public investment.