By Sharon Atieno Onyango
The rising borrowing costs are leaving many developing countries with less money to invest in schools, healthcare, infrastructure and climate action.
This is according to a new United Nations Trade and Development (UNCTAD) report which shows that between 2018 and 2024, 99 developing countries – home to 5.5 billion people – saw rising interest payments reduce the fiscal space available for development.
A counter-factual experiment reveals that if 94 developing countries could borrow at the same rates as developed countries, they would collectively save around $500 billion per year in interest payments.
The report notes that these savings would result in the construction of around 375,000 schools, or 1.3 million primary health clinics, or over 65,000 kilometres of dual carriage highways in rural areas annually.
They could also cover the costs of feeding around 1.6 billion children a minimum dietary diversity diet, or fund over 920 gigawatts of installed solar capacity in these countries.
Notably, developing countries need more money to achieve the sustainable development goals (SDGs), with an annual financing gap of around $4.3 trillion. Closing that gap would require both domestic and external financing to increase by about one third from 2024 levels. This comprises around $230 billion each of additional debt and equity financing each year.
The report also found that developing countries continue to pay significantly more for external financing than developed economies. For instance, developing countries paid higher average returns for all functional categories of foreign liabilities between 2014 and 2024 than developed countries, with the greatest difference evident in portfolio flows. This reflects the risk premium paid by developing countries.
Additionally, developing countries face a widening financing gap. While domestic financing is larger, at around $11.9 trillion, external financing has an outsized influence on the terms and conditions of domestic finance.
According to the report, developing countries received far less external finance than developed countries in 2024. External sources accounted for 11% of investment financing in developing economies, compared with 38% in developed economies.
External financial inflows to developing countries decreased to 18% between 2014 and 2024, while domestic financing rose to 60%.
From the total external inflows to developing countries, Africa only received 10%, despite accounting for 22% of the developing world’s population. Asia and the Pacific attracted more than 70%.
According to the UNCTAD report, rising debt servicing costs have become the principal driver of the high cost of capital and put significant pressure on public finances. In 2024, developing countries paid $384 billion in interest payments on external debt instruments.
Between 2014 and 2024, the cost of servicing external debt grew much faster than the stock of debt itself. Since many developing country governments depend on external financing to finance their expenditure, this has put growing pressure on public finances.
The report argues that reducing external borrowing costs and improving access to finance will require action at both the national and international levels.
National measures should include strengthening macroeconomic frameworks and institutional quality, including sound fiscal management, and economic diversification.
It also involves improving public capacity to manage debt effectively and optimising the structure of debt portfolios by expanding domestic and local currency financing and diversifying the investor base.
Other measures include improving transparency around debt and strengthening communication with investors as well as using innovative financing tools such as green bonds and debt-for-development swaps.
At the international level, the report calls for increasing affordable financing from multilateral development banks, expanding technical assistance for developing countries and strengthening global financial safety nets.
It also calls for improving mechanisms to restructure unsustainable debt and reversing declines in official development assistance.
The report also highlights the role of the Borrowers’ Platform in supporting peer learning, borrower coordination and stronger debt management practices.
