Why are developing countries paying the highest price for borrowing?

Why are external borrowing costs for low- and lower-middle-income countries (LLMICs) so high? The question has been central to global debates this year. With international financial institutions (IFIs) often bailing out private creditors instead of fostering recovery in developing countries, the current financial architecture is fuelling what many describe as a “lethal debt spiral that threatens everyone.”

The urgency has only grown as official aid is set to decline sharply in 2025–26. Not only has the United States shut down the US Agency for International Development (USAID), the world’s largest bilateral donor, several European countries have also cut their aid budgets. These moves come on top of tightening in traditional capital markets. According to an article published on the Project Syndicate, developing countries have largely lost access to commercial finance since 2022, making it either prohibitively expensive—or outright impossible—to refinance maturing debt.

The article cites respected reports such as the Sevilla Commitment, produced at the Fourth International Conference on Financing for Development in June 2025, and the Jubilee Report, commissioned by the late Pope Francis as a blueprint to tackle the global debt crisis.

Both reports recommend expanding development banks, increasing access to private capital flows, enforcing fairer rules for foreign investment, strengthening the global financial safety net, and introducing global taxes to fund public goods. They also call for a clearer strategy to address common “gray zone” situations where debt levels are not high enough to make a country formally insolvent but still suffocate development spending.

In practical terms, this means implementing the World Bank and IMF’s proposed “3-pillar approach”: domestic revenue-raising efforts; increased official financing for countries that commit to structural reforms; and, crucially, reduced debt servicing to commercial creditors during the adjustment period.

The sticking point remains the cost of borrowing, which remains too high for debtor countries to refinance. While the IMF assumes markets will self-regulate, spreads for poorer LLMICs remain elevated—even as those for wealthier middle-income economies have normalised.

As the Sevilla Commitment stresses, without coordinated action to stop capital outflows, developing countries will not be able to grow out of debt. The share of LLMICs’ external debt owed to IFIs has already risen from a median of 35% in 2018 to 45% in 2023. In roughly 20 countries, this share exceeds 75%; in 56, it exceeds 50%. Instead of fostering recovery, inadequate IFI support is propping up creditors and worsening the “lethal debt spiral”—one that threatens not just debtor economies, but also IFIs’ own financial stability.

The author notes that the key question now is whether South Africa’s G20 presidency can turn these principles into concrete agreements. France will take over the presidency next, which, the article argues, presents a unique chance to build a “coalition of the willing” involving most G7 states and China. However, should South Africa fail to bridge the divide between the Global North and South, “the opportunity to resolve today’s debt crisis may be lost for a generation.”

By Nazrin Sadigova