Emerging markets and developing economies (EMDEs) entered 2025 with public debt levels that, on the surface, appear more stable than during the pandemic years. Fiscal deficits have narrowed, and debt-to-GDP ratios have stopped climbing. Yet beneath this apparent stabilization lies a more complex story of financing pressures, costly debt servicing, and declining net capital inflows.
This IMF analysis reveals that while systemic debt crises are less likely than in 2020, vulnerabilities have shifted. Today’s risks stem less from debt stocks and more from interest burdens, rollover pressures, and changing creditor landscapes. Many low-income countries face surging debt service costs, even as their revenue bases remain weak. For emerging markets, reliance on domestic financing and exposure to volatile private flows have deepened.
The result is a new debt dilemma: countries are no longer overwhelmed by sheer debt accumulation, but by the rising cost and complexity of managing it. Without stronger revenue mobilization, structural reforms, and improved international cooperation, financing development goals will remain an uphill battle.
1. Context & Background
- Debt levels surged during the COVID-19 crisis due to increased spending and GDP contraction.
- Since 2021, fiscal deficits have narrowed and debt ratios have stabilized.
- Despite stabilization, financing pressures remain acute, driven by high interest costs, refinancing needs, and weak net capital inflows
2. Key Debt Trends
- Public Debt Ratios:
- Median LIC debt ≈ 55% of GDP (down from 70% in 1994 pre-HIPC initiative).
- Median EM debt stabilized post-pandemic but still elevated.
- Debt Distress:
- Out of 136 EMDEs, only 12 LICs are in debt distress and 2 EMs undergoing restructuring.
- Risk of a systemic crisis is lower than in 2020 but risks remain
- PPEA2025002
- Creditor Composition Shift:
- Non-Paris Club and private creditors’ share in LIC external debt rose from 22% (2010) to 38% (2023).
- EMs’ private and non-Paris Club share increased from 52% to 64%.
- This shift → more expensive debt servicing and harder restructurings
- Domestic Debt Reliance:
- LICs increased domestic debt share by ~18 percentage points since 2010.
- EMs turned to domestic markets heavily during COVID-19
3. Debt Service Pressures
- Interest Costs:
- LIC interest payments tripled from $13bn (2014) → $35bn (2024).
- External debt service in LICs rose from 6% to 16% of revenues in a decade.
- Median EMs spend ~12% of revenues on external debt service, double a decade ago
- Refinancing Needs:
- LICs’ external principal payments:
- >$20bn in 2023, tripled in a decade.
- Expected to exceed $30bn annually (2025–27).
- EMs: Principal payments reached $185bn in 2023, projected ~$350bn annually to maintain exposure
- Net Flows Declining:
- LICs stagnating, private flows retreating.
- EMs net flows down ~40% since 2021, reliance on multilateral creditors increased
4. Regional & Structural Insights
- Africa:
- 22 SSA countries account for 44% of LICs’ total interest payments and 46% of principal payments.
- Latin America:
- Higher relative interest burdens.
- Asia-Pacific:
- Small island states face large primary deficits and domestic debt costs
- Debt Structure Risks:
- New instruments (guaranteed, securitized, collateralized) tied to PPPs and SOEs add hidden liabilities.
5. Revenue Capacity & Structural Weaknesses
- Tax-to-GDP Ratios:
- Over 50% of EMDEs (69 countries) have ratios below 15% of GDP.
- This threshold is critical for sustained growth.
- Mismatch:
- Countries with low revenue capacity often face high interest burdens, trapping them in a vicious cycle
6. Risks & Policy Outlook
- Baseline Outlook:
- No imminent systemic crisis, but vulnerabilities concentrated in subsets of LICs and EMs.
- Risks:
- Shocks to global growth, exchange rates, or financial conditions could trigger distress.
- Domestic debt overhang and bank-sovereign linkages heighten risks.
- Policy Recommendations:
- Boost domestic revenue mobilization.
- Structural reforms to improve growth and export bases.
- Strengthen debt restructuring mechanisms and creditor coordination.
- International support through the IMF/World Bank “3-pillar approach” (financing, reforms, restructuring)
7. Key Insights
Stabilization ≠ Safety
- Debt ratios have stopped rising, but that doesn’t mean countries are safer.
- The quality of debt matters more now: who holds it, how expensive it is, and how soon it needs to be repaid.
- Example: LICs’ debt-to-GDP is ~55%, which doesn’t sound catastrophic, but interest costs have tripled, and revenues haven’t kept pace. That means the same debt is now harder to service.
The Creditor Shift – Why It Matters
- Share of debt owed to non-Paris Club and private lenders rose from 22% → 38% in LICs.
- Private and non-traditional lenders demand higher rates, shorter maturities, and collateral.
- This makes debt more expensive and harder to restructure (no collective coordination like Paris Club).
Domestic Debt – A Double-Edged Sword
- LICs and EMs are turning inward, raising debt from domestic banks and pension funds.
- On the plus side: less exposure to currency risk.
- On the downside: it crowds out private credit and links government solvency to the health of the local banking system.
Refinancing Volumes – The “Wall of Debt”
- LIC principal repayments rising from $20bn → $30bn annually.
- EMs need ~$350bn a year just to keep market access.
- With net flows declining and private investors retreating, they increasingly rely on multilaterals.
The Revenue Trap
- Over half of EMDEs have tax revenues <15% of GDP.
- Meanwhile, debt service takes 16% of revenues in LICs, and ~12% in EMs.
- Countries are essentially paying creditors before funding health, education, or climate resilience.
Regional Meaning
- Sub-Saharan Africa: paying almost half of LICs’ total interest and principal. This diverts funds from infrastructure and social programs, slowing growth.
- Latin America: higher relative interest burdens highlight market distrust and exposure to global rate hikes.
- Small Island States: high primary deficits + climate shocks = ticking time bombs.
The Structural Lesson
- Numbers show that the problem is not just “too much debt,” but the wrong kind of debt: short-term, expensive, poorly diversified, and often opaque.
- Without reforms (broader tax base, stronger exports, transparent borrowing), many EMDEs will remain locked in a cycle: borrow → pay high interest → cut spending → growth stagnates → borrow again.
