Public debt has surged to an unprecedented high level globally, sparking concerns across policymakers, economists, and institutions. Domestic and external debt, once perceived as a tool to stimulate growth and development, is now widely regarded as a threat to global financial stability, particularly in low and middle-income countries (LMICs).
The COVID-19 pandemic, coupled with inflation shocks, natural catastrophes, rising interest rates and geopolitical uncertainty, has further exacerbated debt vulnerabilities, pushing many nations to the brink of debt default. This article critically examines the global debt crisis, explores its root causes, outlines the current debt landscape, and offers comprehensive solutions to navigate out of the crisis.
A Snapshot of the Global Debt Landscape
According to the United Nations Conference on Trade and Development (UNCTAD), global public debt rose to a record $102 trillion in 2024. Approximately two-thirds of global debt is driven by advanced economies. The United States dominates with 34.55% of global debt, over $36 trillion, more than double that of China, the second-largest contributor at 16.12%. Japan follows with 10.01%, while other major contributors include the UK, France, Italy, India, and Germany.
The developing countries account for nearly one-third, around $31 trillion, of this total global debt. These economies spent an unprecedented $921 billion in interest payments in 2024 alone, a financial burden that has significantly constrained public finances and jeopardised essential public services, from healthcare and education to infrastructure development.
Alarmingly, 3.4 billion people now live in countries where more is spent on interest payments than on health or education. This rise in sovereign debt is not merely a financial issue; it is a growing humanitarian concern that threatens progress on global development goals, particularly for low and middle-income countries (LMICs).
The debt burden on the world’s poorest economies, particularly IDA-eligible countries, has risen sharply over the past decade, with surging interest payments and more than half now facing a high risk of debt distress. Figure 1 presents government debt by country in 2024, based on data from the IMF’s October 2024 World Economic Outlook, highlighting each country’s share in the global public debt, which totals approximately 102.1 trillion dollars
Figure 1: A Visual Breakdown of Global Government Debt in 2024
Source: Authors Formation
Why Has Global Debt Ballooned?
The recent surge in debt across LMICs can be attributed to a confluence of global shocks and structural vulnerabilities. The COVID-19 pandemic triggered a wave of emergency borrowing as governments scrambled to fund public health responses, social protection programs, and economic stimulus packages, adding over $633 billion to their debt stock between 2020 and 2023, an 8.1% increase from 2020 levels.
This borrowing spree was followed by a sharp rise in global interest rates, driven by monetary tightening in advanced economies to combat inflation. As a result, LMICs now face soaring debt servicing costs, with interest rates from official and private creditors climbing to 4.09% and 6.0%, respectively, the highest levels since the 2008 financial crisis. Simultaneously, widespread currency depreciation, especially against the US dollar, has inflated the real burden of external debt, given its dollar-denominated nature.
This has been particularly damaging for export and tourism dependent economies, creating a vicious cycle of falling revenues and escalating liabilities. Structural weaknesses, including poor debt management, lack of transparency, over-reliance on short-term borrowing, and weak fiscal institutions, have exacerbated these challenges, leaving many countries incapable to manage their debt sustainably.
The human cost of this debt crisis is profound: rising debt servicing is crowding out critical investments in health, education, and infrastructure. According to UNCTAD and the World Bank, a 1 percentage point increase in debt service-to-GNI is associated with significant declines in spending on essential public services, while IDA countries spent up to 38% of their export revenues on interest payments alone in 2023.
These fiscal pressures undermine development goals as well as they deepen poverty and inequality. The crisis is further worsened by a broken global financial architecture that lacks effective mechanisms for fair and timely debt restructuring. Private creditors often resist negotiations, while sovereign borrowers, fearful of market exclusion, avoid defaults even when repayment is unsustainable.
The IMF-World Bank Debt Sustainability Analysis framework has also come under scrutiny for underestimating risk and promoting austerity-driven policies that suppress growth and social welfare. This “extend and pretend” approach delays meaningful solutions and prolongs the crisis, highlighting the urgent need for systemic reform in the global debt governance framework.
The Path Forward: Solutions to the Debt Crisis
Solving the global debt crisis demands more than temporary fixes, it requires structural reforms rooted in fairness, transparency, and global cooperation. Comprehensive debt relief for heavily burdened countries, especially through actual cancellation rather than rescheduling, is essential.
This must be supported by the creation of a global sovereign debt restructuring mechanism that ensures timely, inclusive, and coordinated action among all creditors, including private ones. Debt-for-development swaps, especially in climate and sustainability sectors, offer a pragmatic way to align financial relief with long-term development goals.
At the same time, strengthening debt transparency, reforming lending practices, and expanding concessional finance are crucial for preventing future crises. Multilateral institutions must innovate through instruments like hybrid capital and crisis clauses, while governments need to boost domestic resource mobilisation and adopt responsible borrowing strategies.
The international aid must also be scaled up, and outdated credit rating systems reformed, to reflect countries real vulnerabilities and development needs. A fairer, more resilient global financial system is possible, but only through collective action and bold reform.
The mounting global debt burden is more than just a number, it is an indication of deepening crisis of inequality, fiscal fragility, and global governance failure. The world’s poorest nations are forced to choose between feeding their people and paying interest to the creditors.
The International Debt Report 2024 makes clear that the current debt trajectory is unsustainable. Fixing the debt crisis requires not just reforms within borrowing nations but systemic change in how global capital markets, development finance, and creditor governance function.
Disclaimer: The views expressed in the article are of the author and do not necessarily represent the institute’s policy.
Authored by: Nazeef Ellahi was formerly affiliated with PIDE.
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