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 other governments (bilaterally), from multilateral institutions (like the World Bank), or from private investors.

External sovereign debt can consist of public sector borrowing or private sector borrowing guaranteed by the public sector, and can have long-term or short-term maturity. This analysis focuses specifically on long-term external public and publicly guaranteed (PPG) debt owed by developing countries.

Sovereign 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. Rising debt costs can crowd out spending on essential public services, weaken economic stability, and increase the risk of financial distress or crisis. High debt burdens can also make countries more vulnerable to external shocks, such as commodity price volatility, climate-related disasters, or global interest rate increases.

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.

What is the cost of 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. 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, increase liquidity risks, and raise vulnerability to global financial shocks.

Debt service consists of interest payments and principal repayments. Interest payments reflect the cost of borrowing and tend to rise when debt is contracted at a higher interest rate or on less concessional terms. Principal repayments are the amounts paid to repay 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.

In what currency is debt issued?

Debt can be issued in different currencies. The currency composition of debt shows the currencies in which governments’ debt obligations are denominated and indicates their 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.