PDMPractice

Debt and Debt Management in 2025

December 15, 2025 By ljpmaurel

2025 was a challenging year for debt management in developing as well as emerging economies. After several years of overlapping global shocks – including the pandemic, geopolitical tensions, volatile commodity prices etc. – many countries entered the year with elevated debt ratios, depleted fiscal buffers, and substantial refinancing needs. Overall borrowing conditions remained far tighter and more expensive than in the pre-2020 period, reinforcing structural vulnerabilities. Aid-dependent countries faced a particularly difficult situation as total ODA is projected to significantly fall in 2025 due to cuts announced by a multitude of large donors.

A Difficult Global Backdrop

Early in the year, several multilateral institutions issued stark assessments of global debt conditions: UNCTAD warned that public debt in developing countries had expanded far more rapidly than in advanced economies since 2010, with interest payments absorbing a growing share of government revenues. Both the IMF and UNDP echoed these concerns, highlighting weakened external positions, tight global liquidity, and sharply elevated rollover risks. In the poorest countries, debt-service costs have multiplied over the past decade, directly constraining social and development spending.

Shifting Financing Patterns and the Rise of Domestic Debt

As the year progressed, volatility in global debt markets intensified. By the second quarter, a clear divergence emerged in issuance patterns. External borrowing in low-income and many lower-middle income countries is projected to have declined significantly as high external yields made foreign currency borrowing prohibitively expensive for many sovereigns.

At the same time domestic debt grew faster than external debt in around 50 countries, signalling a lasting change in sovereign financing strategies. Domestic banks – particularly in low-income and lower-middle-income countries—absorbed increasing volumes of government securities as private credit demand remained weak. While this trend provided short-term financing relief, it also introduced new vulnerabilities as domestic debt often carries shorter maturities, higher rollover risk, and stronger links to financial-sector stability.

Debt Distress and Uneven Restructuring Progress

An estimated US$90 billion in LMIC external debt was restructured over 2024-25, the highest level since 2010, but this was accounted for by a small number of countries. Overall, debt restructuring remained slow and uneven throughout 2025. A notable exception was Ethiopia, which reached a staff-level agreement with its official creditors in May to restructure approximately US$8.4 billion in debt. The agreement, linked to the, aimed to deliver meaningful debt-service relief and restore a measure of macroeconomic stability. IMF’s approval later in the year unlocked new financing and provided temporary breathing space.

Elsewhere, progress proved far more difficult. Several countries, including Ghana, Zambia, and Chad faced prolonged negotiations with creditors, reflecting coordination challenges and divergent creditor interests. These delays reinforced criticism of the existing restructuring framework, with renewed calls for a more predictable and comprehensive global mechanism for addressing sovereign debt distress.

Record Debt Outflows and Tentative Market Stabilization

The World Bank’s International Debt Report 2025, released in December, confirmed the severity of recent trends. Between 2022 and 2024, lower- and middle-income countries experienced the largest net external debt outflows in half a century, as debt service exceeded new external financing by a wide margin.

Late 2025 brought cautious signs of stabilization. International bond markets reopened to a broader range of EMDE and frontier issuers than in the preceding two years, including several African economies. However, access remained costly, with average sovereign yields around 10 percent—roughly double pre-pandemic levels. Countries with credible reform programs and stronger policy frameworks were better able to tap markets, including through green, social, and sustainability bonds, highlighting continued investor differentiation. Climate and sustainability considerations increasingly featured in debt strategies as countries prepared to issue green and sustainability-linked instruments.

Advances in Debt Management Capacity

2025 marked tangible progress in debt management practices. Several countries strengthened their Debt Management Offices by reviewing institutional arrangements, improving risk-monitoring frameworks, and achieving closer integration with fiscal policy and cash management.

Transparency reforms gained momentum, with broader reporting on contingent liabilities, state-owned enterprise debt, and borrowing plans. Investments in debt recording and monitoring systems improved operational efficiency,

The key findings of the World Bank’s Debt Transparency Report published in December showed that the percentage of low-income countries that had not published any debt data over the previous two years fell from 40% in 2021 to 25% in 2024 and that the latter group is comprised mostly of fragile and conflict-afflicted states. The report also found that “legal frameworks and institutional settings in many countries are not conducive to debt transparency”. Further improving debt transparency will require a concerted effort from all stakeholders – borrowers, creditors and IFIs.

Outlook for 2026

Looking ahead, risks remain significant. Domestic financing is likely to continue expanding as external borrowing costs stay elevated, placing greater emphasis on domestic market development and maturity extension. Further restructuring efforts are expected, alongside renewed advocacy for debt relief for low-income countries. While innovative climate and development finance instruments may grow in importance, their macroeconomic impact is likely to remain modest. Overall, debt management in 2026 will require careful balancing between fiscal consolidation, development needs, and stronger international coordination to manage an increasingly complex and costly global financing environment. Countries will also need to continue their efforts to strengthen their debt management capacity.