Government debt in emerging markets and developing economies has roughly doubled since 2010 — from under 40 percent of GDP to over 70 percent. That number alone tells part of the story. What Chapter 3 of the World Bank's June 2026 Global Economic Prospects adds is the mechanism: more debt does not just mean more to repay. It means paying higher rates on everything you borrow, and the problem compounds the deeper you go.
The cost of servicing government debt across EMDEs has risen from 6 percent of government revenues in 2010 to an estimated 11 percent in 2025. That money is not building roads, funding schools, or supporting social safety nets. It is servicing past borrowing. And as rates rise, the space for productive spending shrinks further.
The chapter's central finding is that the relationship between debt and interest rates is non-linear — meaning the damage accelerates as debt levels rise. When a government's debt-to-GDP ratio sits around 45 percent, each additional percentage point of borrowing adds roughly 8 basis points to sovereign spreads. At 80 percent debt-to-GDP, the same one-percentage-point increase adds around 26 basis points. The math becomes punishing at high debt levels. A country that borrowed its way to 80 percent of GDP and then borrows more is not just carrying more debt — it is paying progressively higher rates on all of it.
Between 2010 and 2024, the median EMDE debt-to-GDP ratio rose by 20 percentage points. The World Bank estimates this alone added 114 basis points to sovereign spreads and 31 basis points to domestic-currency bond yields. Add to this the indirect effect of rising debt in advanced economies — the U.S., eurozone, and Japan collectively increased their debt-to-GDP ratios by roughly 12 percentage points over the same period, pushing up their own yields and therefore tightening financing conditions globally — and the combined impact on EMDE dollar-denominated borrowing costs reaches close to 150 basis points.
Not all EMDEs are equally exposed. The chapter finds that countries with a history of default, non-investment-grade credit ratings, frontier market status, heavy reliance on short-term debt, and weak governance face significantly larger interest rate increases for any given rise in debt. In frontier markets, a one-percentage-point rise in the debt-to-GDP ratio is associated with a 24-basis-point increase in sovereign spreads — four times the impact seen in more established emerging markets.
The country cases make this concrete. Sri Lanka, Ghana, and Zambia all entered the 2020s with debt vulnerabilities already embedded, and all three defaulted when the combination of pandemic, global inflation, and rising interest rates hit. Senegal's hidden debt revelation in early 2025 — where reported central government debt jumped from 73.8 to 111 percent of GDP overnight — sent sovereign spreads surging by over 400 basis points within two months.
The policy message is direct. Countries with low debt can still justify deficit-financed public investment, where fiscal multipliers are higher and borrowing costs remain manageable. Countries already carrying high debt loads face a different calculation — where the interest cost of additional borrowing can exceed the return on the spending it funds. For them, fiscal consolidation, stronger revenue collection, longer debt maturities, and development of domestic bond markets are not optional reforms. They are the conditions for keeping borrowing costs from spiralling further.
The share of low- and middle-income countries either in debt distress or at high risk of it has risen from 26 percent in 2015 to around 50 percent in 2026. That is not a peripheral problem. It is the fiscal reality for half the developing world.
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Written By Samyak Naik
