Imagine borrowing money to build a school, fund hospitals, or invest in roads, only to find yourself trapped in an endless cycle of repayments. For many countries, this is the harsh reality of international debt—an issue that continues to shape the global economic landscape. In recent years, debt levels have soared to alarming heights, sparking fears of financial instability, economic slowdown, and worsening inequality. But what exactly is the international debt crisis, and what can be done to resolve it?
A Growing Burden
International debt refers to the money that countries owe to external lenders, such as other governments, international financial institutions like the International Monetary Fund (IMF) and the World Bank, or private investors. While borrowing money can help countries grow by funding essential infrastructure and development projects, excessive debt can quickly become a heavy burden. Many low- and middle-income countries find themselves struggling to make repayments, leading to economic crises and increased poverty.
The COVID-19 pandemic exacerbated this issue. Governments worldwide borrowed unprecedented amounts to support their economies through lockdowns, healthcare crises, and economic downturns. However, as economies started to recover, many countries faced a harsh reality—soaring interest rates and a stronger US dollar made debt repayments significantly more expensive. For some, defaulting on loans (failing to repay) became a serious threat, raising concerns about global financial stability.
The Worst-Affected Countries
Not all nations are equally affected by the international debt crisis. Some, like the United States and the United Kingdom, can manage their debt relatively easily because they borrow in their own currencies and have strong financial institutions. However, many developing nations lack these advantages and find themselves in dire straits, facing ballooning interest rates and severe economic constraints.
Sri Lanka is a prime example of how debt can cripple a nation. By 2022, the country had accumulated a foreign debt of over $50 billion, with $7 billion due in repayments that year alone. Unable to meet its obligations, it defaulted for the first time in history, triggering widespread protests, political upheaval, and economic collapse. Inflation soared past 50%, essentials like food and fuel became unaffordable, and the government scrambled to secure emergency assistance from the IMF, which later approved a $2.9 billion bailout to help stabilise the economy.
Zambia, another nation caught in a debt spiral, borrowed heavily—over $17 billion in external debt—primarily for infrastructure projects, with China being its largest creditor. However, by 2020, as the pandemic wreaked havoc on economies worldwide, Zambia became the first African country to default on its sovereign debt. Negotiations with lenders, including China and Western institutions, have dragged on, delaying much-needed financial relief and investment in essential services.
Argentina, infamous for its repeated debt crises, continues to struggle. The country has defaulted on its debt nine times in its history, with its latest economic woes stemming from over $44 billion owed to the IMF. Inflation in Argentina has soared above 100%, severely devaluing the peso and diminishing purchasing power. Despite repeated restructuring efforts, including a $57 billion IMF loan in 2018—the largest in the organisation's history—Argentina remains trapped in an ongoing cycle of borrowing and financial instability.
These cases illustrate the harsh reality of international debt: while borrowing can provide short-term economic stimulus, unsustainable debt accumulation often leads to financial crises, currency devaluation, and social turmoil. Without effective economic reforms and fairer debt restructuring mechanisms, many developing nations will remain trapped in a vicious cycle of debt dependency.
Why Is Debt a Problem?
For many developing nations, debt is not just a financial issue—it’s a humanitarian crisis. When a country spends a significant portion of its national budget on debt repayments, it has less money to invest in healthcare, education, and social services. This creates a vicious cycle: without investment in these crucial areas, economic growth stalls, making it even harder to repay debt in the future.
Another major issue is the nature of many international loans. Some come with high interest rates, making repayment increasingly difficult. Others are issued in foreign currencies like the US dollar, meaning that if the borrowing country’s currency weakens, its debt suddenly becomes much more expensive. For example, if a country borrows $10 billion when its currency is strong but its value then drops, the cost of repaying that loan skyrockets.
Debt crises also have political consequences. As seen in Sri Lanka, financial struggles can lead to public unrest and government instability. Citizens facing economic hardship often lose faith in their leaders, leading to protests, changes in government, and, in extreme cases, political collapse.
Proposed Solutions: Can We Fix the Crisis?
So, what can be done? Economists, politicians, and international organisations have proposed various solutions to help countries manage and escape the debt trap.
One option is debt relief. This involves reducing or cancelling some of a country’s debt to make repayments more manageable. Organisations like the IMF and the World Bank have provided debt relief schemes in the past, especially for the world’s poorest countries. However, critics argue that these schemes are often too slow and do not address the root causes of debt accumulation.
Another potential solution is restructuring debt agreements. This means negotiating new terms with lenders, such as extending repayment periods or lowering interest rates. Argentina, for example, has repeatedly renegotiated its debts with the IMF, though this has not always provided long-term stability.
Some economists suggest that wealthier nations and international institutions should play a more active role in supporting struggling economies. The idea of a global ‘Marshall Plan’—a large-scale financial assistance programme similar to the one used to rebuild Europe after World War II—has been suggested to help developing nations recover from the pandemic and ongoing economic struggles.
Another proposed solution is to regulate lending more effectively. Some countries fall into a debt trap due to irresponsible borrowing or lending practices. Improved transparency and stricter regulations could help ensure that nations do not take on unsustainable debt.
Developing nations must now focus on sustainable economic growth. By investing in industries that generate revenue, such as manufacturing, technology, and tourism, countries can strengthen their economies and reduce reliance on external borrowing. This requires stable governance, long-term planning, and international cooperation.
The situation at the moment (March 2025)
The world’s poorest countries are facing an escalating debt crisis, with repayments consuming an increasing share of government income. This leaves less funding for essential services like healthcare, education, and infrastructure, the United Nations Development Programme (UNDP) warned on Tuesday.
A newly released UNDP report urges serious consideration of a global debt relief agreement involving all lenders, including wealthy nations, banks, and international institutions. The crisis is worsening rapidly, with 56 developing countries now spending over 10% of their revenue on debt interest—almost double the number compared to a decade ago.
In 17 of these nations, interest payments exceed 20% of government income, a threshold strongly linked to the risk of default. Debt repayment burdens have reached levels unseen in over 20 years, making it increasingly difficult for struggling economies to invest in development. UNDP Administrator Achim Steiner warned that without intervention, many of the world’s poorest countries face a "lost decade" of progress.
The UNDP suggests that a debt relief plan similar to the Highly Indebted Poor Countries (HIPC) initiative could reduce debt by 60%, saving these nations $80 billion. Extending repayment periods by seven years could push this figure to $100 billion, offering much-needed economic relief.
The Future of International Debt
The international debt crisis is far from over, and the coming years will be critical in determining how the global financial system responds. With economic uncertainty, rising interest rates, and geopolitical tensions, many countries remain at risk of financial collapse.
However, history has shown that debt crises can be overcome. South Korea, for example, faced a severe financial crisis in the late 1990s but managed to recover through economic reforms and international support. If struggling nations receive the right assistance and implement sustainable policies, they too can escape the debt trap.
International debt shapes global politics, influences economic development, and affects the lives of millions. The challenge now is finding ways to balance economic growth with responsible borrowing, ensuring that the world's poorest nations are not left behind. Debt relief must happen urgently too.
Debt relief is crucial for the world's poorest nations as it allows them to redirect funds from crippling loan repayments towards essential services like healthcare, education, and infrastructure. Many developing countries spend a significant portion of their income simply paying interest on their debts, leaving little room for investment in long-term economic growth. Without relief, these nations can become trapped in a cycle of borrowing just to meet existing obligations, leading to economic stagnation and worsening poverty. Reducing debt burdens can stabilise economies, create jobs, and improve living standards, ultimately helping countries become more self-sufficient. It also ensures that governments can respond to crises, such as pandemics or natural disasters, without the added pressure of unsustainable repayments.
By providing debt relief, the international community can support sustainable development and reduce global inequality, creating a fairer and more stable economic system.
Here are some sources to further your understanding of the the international debt crisis:
Here’s a list of sources that could be used to support the article on international debt:
International Monetary Fund (IMF) – https://www.imf.org
World Bank – https://www.worldbank.org
The Economist – https://www.economist.com
The Guardian – Global Development Section – https://www.theguardian.com/global-development
BBC News – Business & Economy – https://www.bbc.com/news/business
United Nations Conference on Trade and Development (UNCTAD) – https://unctad.org
Debt Justice (formerly Jubilee Debt Campaign) – https://debtjustice.org.uk
OECD (Organisation for Economic Co-operation and Development) – https://www.oecd.org
Financial Times – Global Economy Section – https://www.ft.com/global-economy
Research Papers & Reports from Universities – https://www.lse.ac.uk
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