Cascading global shocks push developing nations deeper into debt

By Chelsea Robin | 2026-06-29

The world's poorest countries are sinking deeper into a debt and development crisis, with foreign indebtedness at record levels and an increasing number of countries unable to repay the burden.

Years of successive shocks to the global economy have made the global debt outlook for developing countries "highly precarious," according to the Center for Economic and Policy Research (CEPR).

The war in Iran is pushing oil prices over 50% higher than they were a year ago, with the price per barrel hovering around $100 as of May 26.

The intensifying pressure on global energy markets is "increasing the cost of imports and threatening food security and balance of payments stability for many countries," CEPR reported April 15.

"This comes on top of the lingering effects of the COVID-19 pandemic and the commodity and supply chain disruptions triggered by the war in Ukraine, rising trade fragmentation and weak global growth," it said.

Defaulting on development

Low- and middle-income countries are at greater risk of these supply chain shocks as they are more dependent on external financing from international financial institutions and from China -- the world's largest debt collector.

The debt developing countries owe to foreign creditors reached a record $11.4 trillion in 2023, United Nations Conference on Trade and Development (UNCTAD) reported March 17.

Foreign lending can be a vital tool for economic growth and development, UNCTAD said, but "it becomes a problem when repayment costs outpace a country's capacity to pay."

Two-thirds of developing countries are in this precarious position, while high interest rates are worsening the burden, it said.

Most governments avoid default at all costs since the penalties are costly.

"When governments must prioritize debt repayments over public services and investments, people pay the price," UNCTAD said. "Schools are underfunded, hospitals lack supplies and infrastructure crumbles."

In short, "countries may not default on their debt, but they default on their development."

'Tidal wave of debt'

Payments on loans extended a decade ago under Beijing's Belt and Road Initiative (BRI) are now due, as China shifts into debt-collection mode.

"Developing countries are grappling with a tidal wave of debt repayments and interest costs owed to China," Riley Duke, a research fellow at the Sydney-based Lowy Institute, said in a May 2025 report.

"China's earlier lending boom, combined with the structure of its loans, made a surge in debt servicing costs inevitable," Duke said.

"Now, and for the rest of this decade, China will be more debt collector than banker to the developing world," he added.

Last year, the world's poorest and most vulnerable countries made record-high debt repayments to China, totaling $22 billion collectively, according to data from the World Bank Debtor Reporting System.

"The high debt burden facing developing countries will hamper poverty reduction and slow development progress while stoking economic and political instability risks," Duke predicted.

'Debt trap' or development success?

With global economies stretched thin, new lending is drying up, economists say.

"For developing economies, the challenge is not only the immediate impact of higher energy and food prices but also the broader dynamics that can follow: inflation persists, interest rates rise and external financing becomes more costly," CEPR reported.

With China holding a vast majority of external bilateral debt in developing countries and in the world's poorest and most vulnerable economies, international financial institutions have been hard-pressed to provide any meaningful relief.

Some have criticized China's lending under the BRI as "debt trap diplomacy."

To mitigate the economic risks of Beijing's biggest infrastructure development program, international institutions urge greater transparency.

"China's opaque lending practices, however, distort debt sustainability analysis and impair economic surveillance," the Council on Foreign Relations (CFR) said.

The two main lenders -- the China Development Bank and the Export-Import Bank of China (China EXIM) -- do not report the terms of their loans, and China does not publish regular official reports on foreign aid.

Chinese foreign aid between 2013 and 2018 totaled $39.8 billion, according to the most recent data made available by the State Council Information Office of China in 2021.

Others say the BRI has funded transportation corridors -- trains, roads and ports -- in recipient countries, expanding global trade links and helping the economic development of many of the world's poorest countries.

"For recipient countries, however, the jury is still out: it remains to be seen whether the gains from China's lending -- through growth and improved infrastructure -- will outweigh the more immediate burdens of debt service or the multifaceted costs of default," the National Bureau of Economic Research reported last October.