What is sovereign debt?

Sovereign debt is the money national governments borrow to finance public spending when tax revenues and other domestic resources are insufficient. Governments can borrow from domestic creditors or externally from foreign creditors, including from other governments (bilaterally), from multilateral institutions (like the World Bank), or from private investors.

External public sovereign debt can consist of public sector borrowing or private sector borrowing guaranteed by the public sector, and repayments can be due over a short-term period (generally less than one year), or long-term—known as maturity. This analysis focuses specifically on long-term external public and publicly guaranteed (PPG) debt owed by developing countries, defined as low- and middle-income countries.

Debt plays an important role in supporting economic growth and funding essential investments in health, education, and infrastructure in developing countries. It also carries risks. High debt levels or expensive borrowing place significant pressure on public finances. High debt servicing costs can crowd out government spending on essential public services, weaken economic stability, and increase the risk of financial distress. This debt burden can also make countries more vulnerable to external shocks.

How much debt do countries hold?

Debt stocks measure the total amount of outstanding debt that a country owes. Changes in debt stocks are driven by new borrowing and repayments, and other factors such as exchange rate fluctuations and debt restructuring.

Rising debt stocks are not inherently a sign of vulnerability, especially when borrowing supports growth-enhancing investments. Debt-related risks increase, however, when debt accumulates faster than a country’s capacity to service it, or when exposure becomes concentrated in more costly or volatile forms of financing, such as high-interest commercial loans, that leave little room to absorb a sudden shock.

How much debt is owed to whom?

The mix of creditors a country owes matters because different lenders offer very different interest rates, repayment terms, and levels of flexibility in times of crisis. Loans from multilateral development banks (MDBs) and traditional bilateral donors are typically long-term, lower-interest, and more predictable, and they often include grace periods or options for relief during shocks. By contrast, private creditors and some bilateral lenders—such as China—often lend at higher interest rates, with shorter maturities and less transparency, which can increase refinancing risks and debt-servicing costs. When a larger share of a country’s debt is owed to these creditors, governments may face tighter budgets and more difficulty restructuring debt during distress, making the overall creditor makeup a key factor in assessing debt sustainability.

The composition of debt has changed significantly over the past twenty years. Before 2000, most external debt owed by low- and middle-income countries was borrowed from traditional donor countries – the high-income countries that make up the Paris Club. Since then, private sector lending to emerging markets has more than trebled. And China has become a major lender, particularly to African countries. While debt to China makes up less than 6% of total PPG debt on average, it makes up more than one third of total debt for several African countries, including Zambia and Angola. China is also now the largest bilateral government lender.

How much new debt is disbursed?

When countries borrow, they rarely receive the full amount at once. Disbursements are the portion of loan financing that is actually paid out to a country in a given year—not the full amount agreed upfront. Debt disbursements matter for understanding debt pressures. They reveal whether countries are relying more on lower-cost concessional financing from bilateral and multilateral lenders or on costlier private borrowing—patterns that can signal changing development needs, market access, and future debt risks.

Many loans are committed over several years, so future disbursements shown below are estimates based on existing loan contracts and expected payout schedules, not new borrowing decisions. This distinction matters because debt commitments (which are not shown here) reflect promises made when loans are signed, while disbursements show when countries actually receive the money and begin to put it to use. Countries may still take on additional debt in the future.

What is the cost of servicing debt?

Debt service refers to payments a government makes against its loans. It is a product of how much was borrowed and at what cost. The cost of borrowing varies by the type of lender. Private lenders tend to charge higher interest rates than multilateral institutions, which generally offer more favourable terms, known as concessional loans. As a result, countries with a greater share of private debt will face higher debt servicing costs on average. High debt servicing costs can put pressure on government budgets and raise vulnerability to global financial shocks.

Debt service consists of interest payments and principal repayments. Interest payments reflect the cost of borrowing and rise when debt is contracted on less concessional terms. Principal repayments are the amounts paid towards the original amount borrowed. Interest and principal repayments shape the size and timing of governments’ debt obligations and affect how sustainably debt is managed over time.

Rising debt payments can squeeze fiscal space, forcing governments to divert resources away from investments in people and long-term development. When a government is committed to repaying creditors, these payments are typically non-negotiable, meaning when budgets tighten, it is often critical public services that absorb the shortfall. Servicing debt often outpaces government spending on healthcare and education in many developing countries. In the latest year for which data is available, 53 countries spent more on debt servicing than health, and 24 countries spent more on debt servicing than education.

The consequences of these financing decisions compound over time: underinvestment in healthcare and education leaves populations more vulnerable to disease and economic shocks, constraining long-term growth and development.

In what currency is debt issued?

Debt can be issued in different currencies. The currency composition of debt indicates the exposure to exchange rate risk. Domestic currency depreciations increase the cost of servicing foreign-currency-denominated debt, even when borrowing levels remain unchanged. This exposure can increase pressure on public finances, especially during economic or financial crises.

Is debt sustainable?

Debt sustainability refers to a government’s ability to meet its debt obligations without compromising economic stability or essential public services. The debt sustainability of developing countries is commonly assessed through Debt Sustainability Analyses (DSAs) by the International Monetary Fund in collaboration with the World Bank. DSAs evaluate a country’s debt outlook under a baseline scenario and a range of stress scenarios, and classify countries according to their risk of debt distress. Currently the IMF and World Bank conduct DSAs for a group of 68 lower-income countries.