Developing Nations Face Historic Debt Squeeze Amidst Shifting Global Finance
Developing countries, including Nigeria, are grappling with an unprecedented debt squeeze, a situation exacerbated by mounting external liabilities that reached a staggering $8.9 trillion in 2024. This alarming figure, detailed in the World Bank’s 2025 International Debt Report, paints a stark picture of the fiscal pressures confronting these nations. The report reveals a significant financial deficit, with these countries paying $741 billion more in principal and interest than they received in new financing between 2022 and 2024. This shortfall is the largest observed in at least half a century, intensifying concerns for global lenders and investors alike.
While a slight reprieve was noted in 2024 as global interest rates plateaued and bond markets showed signs of reopening, the overall situation remains precarious. The World Bank highlighted that nations managed to avert widespread defaults through the restructuring of $90 billion in external debt, marking the most substantial annual debt restructuring since 2010. Private bondholders played a crucial role, injecting $80 billion more in new financing than they recouped through repayments, thereby enabling several countries to successfully issue multi-billion-dollar bonds. However, this influx of capital came at a considerable cost, with interest rates hovering around 10 percent, approximately double the levels seen before 2020.
Indermit Gill, World Bank Group Chief Economist and Senior Vice President for Development Economics, issued a stern warning: “Global financial conditions might be improving, but developing countries should not deceive themselves; they are not out of danger. Their debt build-up is continuing, sometimes in new and pernicious ways. Policymakers everywhere should make the most of the breathing room that exists today to put their fiscal houses in order, instead of rushing back into external debt markets.”
Nigeria’s Position: A Case Study of Vulnerability and Support
Nigeria, classified as an IDA-eligible country, stands among the significant borrowers from the World Bank’s concessional financing arm. In 2024, the World Bank provided a substantial $18.3 billion more in new financing than it received in repayments from IDA-eligible countries, complemented by a record $7.5 billion in grants. This level of support is deemed indispensable, particularly as bilateral creditors, primarily foreign governments, have largely withdrawn their lending. These creditors collected $8.8 billion more in repayments than they disbursed in new financing, a trend that has emerged following debt relief initiatives that, in some instances, reduced long-term debt by as much as 70 percent.
The nation’s own debt figures underscore the ongoing challenges. According to the Debt Management Office, Nigeria’s external debt for its population exceeding 200 million stood at approximately $47 billion as of June 2025, a slight increase from $45.97 billion recorded in the first quarter of 2025.
The Social Toll of High Debt Burdens
The repercussions of elevated debt levels extend far beyond financial indicators, impacting the social fabric of developing nations. The World Bank report underscored that these countries collectively paid a record $415 billion in interest alone in 2024. This colossal sum represents a significant diversion of funds that could otherwise have been allocated to critical sectors such as education, healthcare, and the development of essential infrastructure.
The social consequences are particularly acute in the most heavily indebted countries, where external debt surpasses 200 percent of export revenue. In these nations, an average of 56 percent of the population struggles to afford the minimum daily diet required for long-term health. For IDA-eligible countries, including Nigeria, this dire situation affects nearly two-thirds of residents, highlighting a profound link between national debt and food insecurity.
Shifting Financing Landscape: The Rise of Domestic Debt
The report also points to a notable shift in financing strategies, with a growing reliance on domestic sources. Data from 86 countries indicates that more than half experienced faster growth in domestic government debt compared to external debt in 2024. While this trend can be interpreted as a sign of progress in developing local capital markets, the World Bank cautions against excessive domestic borrowing.
Haishan Fu, the World Bank Group’s Chief Statistician and Director of its Development Data Group, commented on this phenomenon: “The rising tendency of many developing countries to tap domestic sources for their financing needs reflects an important policy accomplishment. It shows their local capital markets are evolving. But heavy domestic borrowing can spur domestic banks to load up on government bonds when they should be lending to the local private sector. Domestic debt also comes with shorter maturities, which can raise the cost of refinancing. Governments should be careful not to overdo it.”
The risks associated with heavy domestic borrowing are multifaceted. It can lead to domestic banks prioritizing government bonds over lending to the private sector, potentially stifling economic growth. Furthermore, the shorter maturities often associated with domestic debt can increase the frequency and cost of refinancing, creating a perpetual cycle of financial management challenges. As developing nations navigate this complex debt landscape, careful fiscal management and a strategic approach to both domestic and international financing remain paramount.
