As the world grapples with overlapping environmental and economic crises, developing countries are facing a growing dilemma how to balance the rising cost of debt with the urgent need for climate resilience. At the heart of this issue is a global financial architecture that leaves low- and middle-income countries struggling to finance development without compromising their climate goals.
The scale of the problem is vast. Developing countries now owe $29 trillion in public debt an amount that has nearly doubled over the past decade. Much of this debt is external, borrowed from foreign lenders, and increasingly unsustainable. For countries like Sri Lanka and Kenya, such financial stress has already translated into economic turmoil and civil unrest. In Sri Lanka’s case, heavy foreign borrowing to cover budget deficits left the country with depleted foreign reserves and forced it to default on its external debt in 2022, triggering a national crisis.
Now, attention has turned to Seville, Spain, where world leaders are meeting for the Fourth International Conference on Financing for Development (FfD4). High on the agenda is the pressing question of how to support climate action in developing nations, many of which contribute the least to global emissions but face the greatest risks from climate change.
Small island states such as Nauru illustrate the extent of this vulnerability. With just 21 square kilometres of land and contributing a negligible amount to global emissions, Nauru is now offering citizenship for $105,000 to raise funds to relocate 90 percent of its population to higher ground as sea levels rise. The so-called “golden passport” plan underscores the financial desperation many nations are experiencing as they try to protect their populations and environments.
At a global level, the scale of public debt has reached a record $97 trillion, with developing countries accounting for nearly a third of that total. While debt can play a positive role in financing public goods like education and infrastructure, its explosive growth fueled by repeated crises and slow global economic recovery has become a liability for many nations. External debt, in particular, exposes countries to currency shocks, drains foreign-exchange reserves, and limits their ability to invest in long-term development.
Data from the World Bank reveals that between 2013 and 2023, the external debt of developing countries rose by 55 percent, outpacing gross national income (GNI), which grew by 52 percent over the same period. The share of low- and middle-income countries (LMICs) with external debt liabilities exceeding 50 percent of GNI nearly doubled from 36 to 52 countries. In extreme cases, like Mozambique, external debt is more than three times the size of its national income.
In regions such as Asia-Pacific, external debt stocks held by governments almost doubled in the past decade. Even when China is excluded from the data, public debt in the region has increased by 1.7 times, reaching $1.16 trillion by 2023. Similar patterns are seen in Latin America and Africa, where sovereign debt has surged by over 60 percent. Africa alone now holds $689 billion in sovereign debt double what it owed in 2013 with more countries at risk of debt distress.
This worsening debt burden is colliding with the climate crisis at a time when financing for climate adaptation and low-carbon development is both critical and scarce. The United Nations estimates that each citizen in developing countries would need about $488 per year in climate finance by 2030 to meet necessary targets. Yet, current aid and investment levels are falling far short of these goals.
International support is faltering. Several developed nations including the US, UK, France, and Sweden are scaling back foreign aid, and some financial institutions are retreating from their climate commitments. The failed negotiations at COP29 in Baku last year, which were meant to finalize a new collective goal for climate finance, have further dampened hopes for progress.
The widening gap between debt and income in the Global South is not just an economic issue it’s a threat to climate justice and global stability. Unless global financial systems are restructured to provide fair access to affordable finance, developing countries will remain trapped in a cycle of debt dependency, unable to prioritize climate action or invest in long-term resilience.
The FfD4 conference may offer a crucial opportunity to address these structural imbalances. Whether the global community can rise to the challenge remains to be seen, but the stakes for people, the planet, and the path to a sustainable future could not be higher.