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The Debt Dilemma: A Growing Challenge for Developing Nations
As the global economic landscape continues to evolve, developing countries are facing a critical dilemma. They are increasingly forced to choose between repaying their debts and investing in essential sectors such as health and education. According to recent data, 3.4 billion people live in nations where the cost of servicing public debt exceeds the budgets allocated to these vital areas.
The UN Conference on Trade and Development (UNCTAD) highlighted this pressing issue during the Fourth International Conference on Financing for Development held in Seville, Spain. The agency emphasized the need for governments and development partners to prioritize public debt vulnerability as a top concern. It noted that while public debt can be a powerful tool for development, it often becomes a burden when it grows too large or becomes too costly.
Kenya is among the many developing nations grappling with this challenge. The country spends a significant portion of its export revenues on debt servicing. In the financial year ending June 30, 2025, Kenya allocated Sh1.85 trillion for debt repayment, which included Sh843.4 billion for debt redemption and Sh1.1 trillion for interest payments. This amount far exceeds the Sh1.1 trillion earmarked for interest payments in the current financial year. Meanwhile, the government has allocated Sh702.7 billion for education and Sh139 billion for health, highlighting the stark imbalance in resource allocation.
Kenya’s total public debt currently stands at Sh11.4 trillion, with domestic loans accounting for Sh6.1 trillion and external loans at Sh5.3 trillion as of March. To transform public debt from a burden into a development tool, UNCTAD calls for fairer mechanisms to reduce borrowing costs, facilitate timely debt restructuring, and go beyond the limits of the current G20 Common Framework for Debt Treatment.
The organization also supports the Sevilla Commitment, which aims to triple the lending capacity of multilateral development banks—from $50 billion to $150 billion. This initiative would help developing countries boost investment and manage their debt more effectively.
Regional Disparities and Systemic Challenges
The report highlights significant disparities among developing regions. Asia and Oceania hold 24% of global public debt, followed by Latin America and the Caribbean (5%) and Africa (2%). These figures underscore the uneven distribution of debt burdens across different parts of the world.
UNCTAD points to systemic inequalities in international financial systems as a major obstacle. Since 2020, developing regions have been borrowing at rates two to four times higher than the United States. In 2023, developing countries paid $487 billion to foreign lenders, with half of these economies spending at least 6.5% of their export earnings to service external public debt.
This trend has led to a net debt outflow for years, with developing countries paying $25 billion more to creditors than they received in new debt disbursements. The situation is worsening due to high interest rates, low global growth, and rising uncertainty, all of which strain public finances and make sustainable debt management increasingly difficult.
In 2024, developing nations paid $921 billion in net interest on public debt, a 10% increase from the previous year. A record 61 developing economies spent at least 10% of their government revenues on interest payments, leaving less funding for critical areas like health, education, and climate action.
The Impact of High Borrowing Costs
High borrowing costs are a key driver of this dynamic. These elevated rates increase the resources needed to pay creditors, making it challenging for developing countries to finance investments. Since 2020, developing regions have been borrowing at rates two to four times higher than those of the United States, exacerbating the debt crisis.
Addressing these challenges requires a coordinated global effort to create a more equitable financial system. By implementing fairer mechanisms, enhancing debt restructuring processes, and increasing access to affordable financing, developing countries can work towards a more sustainable path of development.
