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The spike in borrowing costs is cutting the room for developing countries to fund education, health, infrastructure, and climate change efforts, the UN warns.
Faced with much more expensive financing conditions than those in advanced economies, these countries see their investment capacity shrink, prompting UNCTAD (United Nations Conference on Trade and Development) to call for reforms and stronger international cooperation.
As borrowing costs rise, an increasing share of public resources goes to paying debt interest. That’s money that’s no longer being spent on long-term investments.According to the UN agency based in Geneva, this pressure comes as developing countries need to meet growing infrastructure needs, strengthen their education and health systems, and promote job creation.
Pressure on public finances
The report notes that the rising cost of debt service is putting increasing pressure on public finances. Between 2018 and 2024, 99 developing countries saw higher interest payments reduce the budget space available for development spending. In total, these countries have 5.5 billion people.Just in 2024, developing countries paid $384 billion in interest on their external debt. Over the past decade, government interest payments have risen by 102%, while public revenue has only grown by 39%.
‘As a growing share of public resources is devoted to debt servicing, governments have less room to invest in education, health, infrastructure, and other development priorities,’ laments UNCTAD.Dozens of developing countries urgently need debt relief.
The Global South is paying a high price
The report highlights a persistent imbalance in the international financial system. Developing countries consistently pay higher costs for external financing—especially in the form of debt—than developed economies, despite having significant investment needs.
The report estimates that developing countries need to invest an additional $4.3 trillion each year to achieve the Sustainable Development Goals (SDGs). Closing this gap will require raising both external and domestic sources of funding by at least a third.However, new external funding is declining and accounted for only 11% of total investment in developing economies in 2024, compared to 38% in developed countries.
Easing the debt burden
According to the report, reducing financing costs could free up significant resources for development.
UNCTAD estimates that if 94 developing country governments could borrow at the same rates as developed economies, they could collectively save about 500 billion dollars per year in interest payments.
The report argues that meeting this challenge will require action at both the national and international levels, including better debt management, increased affordable financing from multilateral development banks, improved debt restructuring mechanisms, and reforms to the global financial architecture.When financing is insufficient and too costly, it is more difficult to promote development,” UNCTAD concludes, recommending expanding access to affordable, stable and long-term finance, not only for financial reasons, but also for development.
