New Report Warns of Growing Debt and Climate Crises in Developing Countries
A new report from the Center for Economic and Policy Research (CEPR) examines the sovereign debt trap cycle and the need for systemic reforms to the international financial architecture that perpetuates it. As of March 2026, 75 out of 119 low- and middle-income countries evaluated by the International Monetary Fund (IMF) and credit rating agencies were either already facing a debt crisis or are at high risk of one. Developing countries are forced to choose between meeting debt obligations and investing in vital public services, climate resilience, infrastructure, and other Sustainable Development Goals.
“Our report shows how the debt and climate crises are interconnected,” report coauthor and CEPR Senior Research Associate Ivana Vasic-Lalovic said. “Developing countries shouldn’t have to choose between paying off debt and funding schools, hospitals, or climate preparedness and response.”
The economic impact of the Iran war is likely to worsen these dynamics, due “not only [to] the immediate impact of higher energy and food prices, but the broader dynamics that can follow: inflation persists, interest rates remain high, and external financing becomes more costly,” the report states.
It goes on to note: “In the context of multiple unfolding crises, the current debt burden of developing countries is unsustainable and requires a comprehensive policy response, including systemic reforms, debt cancellation, as well as immediate relief measures.” The IMF warned this week in its World Economic Outlook that the Iran war could lead to the risk of a global recession in a “severe scenario” of highly elevated oil prices continuing through 2027. An adverse, but less severe, scenario could lead to only 2.5 percent global growth this year and a 1.5 percent increase in inflation, and IMF Managing Director Kristalina Georgieva warned that “now, even our most hopeful scenario involves a growth downgrade” due to damage to oil and shipping infrastructure, supply disruptions, “and other scarring effects.”
The CEPR report finds that interest payments on external public debt rose from 1.4 percent of government revenue in 2010 to 3.5 percent in 2024 — higher than during the COVID-19 pandemic crisis. Higher interest on debt at a time of lowered economic growth risks creating the kinds of debt traps that have ensnared countries in the past, leading to the Jubilee movement for debt cancellation, debt audits, and greater scrutiny of foreign debt holdings.
“Unfortunately, the dynamic is all-too familiar: the IMF continues to insist on conditions that put many countries in a debt trap, where burdensome debt service payments prevent governments from being able to spend on essential services and human needs ― as well as on climate response and climate change mitigation measures,” coauthor Paola Jaimes said.
“The IMF — and therefore the US government, which has decisive influence there — can no longer ignore their responsibility in both the debt and climate crises. We need climate finance commitments that won’t worsen indebtedness, such as a new issuance of SDRs. Without urgent reforms, the world’s most vulnerable countries will remain trapped in a never-ending cycle of debt distress and climate disaster,” CEPR Co-Director Mark Weisbrot said.