Public spending in developing countries shrinks on rising debt cost

The rising cost of debt is squeezing public spending in three quarter of developing countries, the UN Trade and Development (UNCTAD), stated.

According to calculations by UN Trade and Development (UNCTAD), rising borrowing costs are leaving developing countries with less money for public spending, as debt servicing absorbs a growing share of government revenues. In many cases, mounting liquidity pressures risk turning into deeper crises.

The UN agency noted that 99 developing countries – 73% of the total – between 2018 and 2024 have seen public spending shrink significantly.

For much of the past decade, UNCTAD stated, developing countries have been paying more and more to borrow, leaving less money for schools, hospitals, climate action and other critical public investments.

“The consequences are now visible in public finances: higher interest bills mean governments have fewer resources for other priorities.

“As debt servicing absorbs a growing share of revenues, investment in development priorities is being squeezed,” it said.

Shift to private credit left developing countries more exposed

In the favourable global financial environment that followed the global financial crisis, many countries increasingly turned to private credit. Though abundant and relatively affordable at the time, this funding left countries more exposed to external shocks.

From 2022, the tide turned sharply as central banks in developed countries raised their policy interest rates to tame inflation at home. These benchmark rates influence the cost of borrowing worldwide – especially for debt from private investors and commercial banks, but also from official lenders such as multilateral development banks. As a result, borrowing costs across the developing world climbed markedly.

Liquidity pressures risk turning into deeper debt crises

Higher borrowing costs have also weakened debt sustainability – the ability of governments to manage and repay debt – increasing the risk of severe economic strain.

In September 2025, 49% of countries eligible for concessional financing from the International Monetary Fund (IMF) were either in or at high risk of debt distress. In many cases, these challenges reflect liquidity problems rather than outright insolvency. In other words, governments often struggle to meet short-term payment obligations even though their debts might still be manageable over the longer term.

Yet containing such pressures is increasingly difficult. Weak growth and trade prospects as well as limited access to the global financial safety net – emergency lending mechanisms provided by, for example, by regional financial arrangements or institutions such as the IMF – restrict the ability of many countries to stabilize their finances.

Liquidity squeezes can therefore harden into deeper crises. Three quarters of the countries judged by the IMF and the World Bank to be in debt distress or at high risk of it in September 2025 had been in that position since at least 2018.

In effect, many governments are being forced to default not formally on their debts but on their development ambitions.

Better debt management can offer some relief

Better debt management could help prevent matters from worsening. In 2025, UNCTAD released a new version of its Debt Management and Financial Analysis System, known as DMFAS 7, designed to improve the quality, coverage and timeliness of public debt data.

“Digital systems such as this can help governments track liabilities more accurately, identify risks earlier and respond more quickly when pressures mount. Stronger debt management also supports better decision-making, allowing countries to make more informed choices about borrowing.

“Improved capacity can also strengthen creditors’ confidence in countries’ abilities to manage their debt sustainably and repay outstanding obligations on time. This in turn can help lower borrowing costs by reducing the additional premium lenders demand as compensation for the perceived risk,” the UN body further said.

Borrowing countries seek stronger coordination

Governments are also exploring ways to strengthen cooperation among borrowers to share experience and knowledge to improve debt sustainability and aspects of the international financial architecture.

To support this effort, the Borrowers’ Platform will be launched on the margins of the IMF and World Bank Spring Meetings in April 2026 in Washington, DC.

Such initiatives may help, but the broader trend is sobering. As borrowing costs rise and fiscal space shrinks, developing countries are finding that the cost of finance is not merely financial. It is measured in postponed investments, constrained budgets and development goals drifting further from reach.