## DEBT VULNERABILITIES IN LICs: RECENT DEVELOPMENTS AND TRENDS (Chapter summary)

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### Context and purpose
- Covers public debt vulnerabilities and financing challenges in Low-Income Countries (LICs), with a special focus on domestic debt issues.
- "LICs" refers to the 69 countries that use the LIC DSF; LIC DSF data is available for 67 countries with a recent LIC DSA.

### Key observations on recent developments
- Public debt rose steadily before COVID-19 and increased sharply during 2020-21; tighter global financial conditions compounded burdens.
- Staff projections under baseline assumptions: debt service obligations will remain elevated and above pre-pandemic peaks, with Sub-Saharan African LICs particularly burdened.
- A few countries remain particularly vulnerable to debt becoming unsustainable.
- Strengthening debt management and debt transparency is critical for sustaining creditor relations.

### Shift to domestic debt financing (key statistics)
- Domestic public debt-to-GDP in LICs: rose from "8 percent" of GDP in 2014 to over "17 percent" of GDP in 2024.
- By 2024, "80 percent" of LICs issued domestic debt through local markets.
- Marketable instruments accounted for around "60 percent" of domestic issuance by 2024.
- Over one-fifth of LICs now have more domestic than external debt.
- Countries with low tax revenue and high domestic debt levels face acute challenges.

### Social and developmental implications
- Elevated debt service absorbs scarce revenues, squeezing fiscal space for education, health, infrastructure, and job creation.
- In 2024, "88 million" young people (age 12-24) lived in LICs simultaneously facing low revenues, high debt service, and elevated risks of debt distress.

### Domestic debt vulnerability metrics used
- Three primary metrics: level of domestic public debt-to-GDP, primary deficits, and debt service-to-revenue.
- Complementary assessment of macro-financial risks: banking sector exposure, private credit trends, and net foreign assets.

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### Evolution of public debt vulnerabilities

Fiscal consolidation and public debt levels
- Fiscal consolidation has been key but uneven across countries.
- For the median LIC, the primary deficit narrowed to roughly half of its pandemic peak (in excess of "3 percent of GDP") by 2024; it is now near pre-pandemic levels and expected to further narrow under staff’s baseline.
- Frontier LICs made significant gains in primary balance consolidation; FCS/FCV LICs and commodity exporters adjusted more modestly.
- Median SSA LIC had the largest post-pandemic primary deficit (over "4 percent of GDP") and consolidated more than "2½ percent of GDP" between 2022 and 2024.

Current public debt status and risk assessment
- Public debt levels expected to stabilize or marginally decline but remain above pre-pandemic peak (at "49 percent of GDP" by end 2024).
- Since 2018, median SSA LIC has had the highest public debt-to-GDP among peers.
- Of 69 LICs in the note’s perimeter, only 10 countries are in debt distress or have unsustainable public debt: Republic of Congo, Djibouti, Ethiopia, Grenada, Lao PDR, Malawi, Maldives, Sao Tome and Principe, Sudan, and Zimbabwe. Eritrea has protracted arrears with multilateral creditors; Yemen has arrears with official bilateral creditors.
- The share of countries at high risk of external debt distress briefly increased at pandemic onset but improved since 2021; the share is now six percentage points lower.
- FCS/FCV and Small Developing States (SDS) record the largest share of high-risk external debt distress ratings (over "45 percent"); SSA and Commodity Exporter countries record lower incidences (less than "1/3" and "1/4", respectively).

Liquidity versus solvency dynamics
- Liquidity risks have become more prominent: a higher share of high-risk LIC-DSF ratings were triggered by breaches of liquidity indicators (debt service to revenue or debt service to exports) over the last four years.
- Continuous monitoring of liquidity constraints is important to prevent liquidity pressures evolving into solvency problems.

Uncertainties and data limitations
- Downside risks include weaker global growth, shifts in international financial conditions, reduced official aid, exchange rate volatility, weaker domestic reforms, or multiple shocks.
- Debt data limitations and transparency gaps may understate challenges:
  - Public debt reporting improved; share of countries producing debt bulletins has grown over 5 years.
  - In 2024, less than "25 percent" of LICs (mostly FCS/FCV) had not published any debt data over the previous two years, compared to "40 percent" in 2021.
  - Only one in four countries reports loan-level information on newly contracted debt.
  - Comprehensive sectoral coverage is rare; subnational borrowing, contingent liabilities, and SOE debt often excluded.
  - Instrument complexity and broader public sector issuance risk creating "hidden debts" if coverage is not expanded.

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### Elevated debt service obligations, financing needs, and net flows

Gross financing needs (GFNs) and trends
- GFNs almost doubled between 2014 and 2024.
  - Median GFNs: rose from "4 percent of GDP" in 2014 to about "8 percent of GDP" by 2024.
  - The largest shift occurred between 2019 and 2022, by almost "4 percentage points of GDP".
  - The GFN level in 2024 remains "70 percent" higher than a decade earlier.
- GFNs are higher in Frontier economies and commodity exporters, often driven by high public domestic debt service.
- Refinancing requirements are projected to exceed "$35 billion" annually through 2028.
- Average annual gross flows of about "$40 billion" per year to LICs will be needed in the next few years just to maintain exposure.

Global funding conditions and bond spreads
- Global financial conditions tightened sharply in 2022; EMDE bond spreads rose.
- As volatility subsided, spreads broadly retraced to near pre-pandemic lows for most countries; share trading at distressed levels (> "1000 bps") fell from nearly "10 percent" a year ago to under "5 percent" by end-August 2025.
- Despite retracement, benchmark rates remain elevated compared to pre-COVID-19.

Debt service burdens and fiscal crowding-out
- Interest payments on total public debt rose from around "US$13 billion" in 2014 to "US$35 billion" in 2024.
- Median SSA LIC interest-to-revenue ratio was nearly "11 percent" in 2024—close to one third higher than the median LIC.
- Frontier LICs’ external debt service-to-revenue and interest-to-revenue ratios in 2024 were over one-third and almost twice, respectively, relative to the median LIC.
- These pressures constrain financing for development and buffer-building; staff project some decline in ratios but expect median SSA LIC to remain significantly higher than median LIC.

External refinancing needs and creditor composition
- External principal payments estimated to have exceeded "US$34bn" in LICs in 2024, more than quadruple a decade earlier.
- Over three-fourths of these payments were due to official creditors; most of the remainder to commercial lenders.
- LICs’ external refinancing needs for 2025-28 remain elevated.

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### Evolution of public domestic debt: levels, composition, and risks

Levels and recent trends
- Public domestic debt in LICs: "8 percent" of GDP in 2014 → "12 percent" in 2019 → "17 percent" in 2024.
- Median LIC raised its share of public domestic debt by "10 percentage points" between 2014 and 2024.
- Share of countries with domestic debt > half of total public and publicly guaranteed debt: doubled from "10 percent" in 2014 to "21 percent" in 2024.
- Pandemic amplified domestic borrowing reliance, notably for SSA, frontier LICs, and FCS/FCV LICs: frontier LICs’ median domestic debt increased from "15" to "20 percent of GDP" over 2019-21.
- Since 2021, post-pandemic surge driven by SSA and FCS/FCV countries: public domestic debt burden rose by "2" and "6" percentage points of GDP, respectively—compared with "0.9" percentage points in the median LIC.

Domestic debt service and composition
- Domestic debt service more than doubled: from "2.1 percent of GDP" in 2014 to "4.7 percent of GDP" in 2024.
- End-2024 composition (coverage: 60 countries): Marketable "59.1%", Non-Marketable "24.3%", Arrears "16.6%".
  - Within marketable: T-bills "21.4%", T-bonds "37.4%", Sukuk "0.3%".
  - Within non-marketable/other: Loans "11.9%", Central Bank "7.2%", Guarantees "0.7%", SOE debt "0.6%", Other "4.0%".
- Of 60 countries covered, "80 percent" issue marketable debt; of non-issuers, about two-thirds are FCS/FCV and the remainder are small states.
- Regional patterns: marketable share highest in South Asia (SAR) and Europe and Central Asia (ECA); non-marketable dominant in East Asia Pacific (EAP) and Latin America and Caribbean (LAC).

Domestic debt transparency developments
- Domestic debt transparency improved since 2020 (World Bank assessment), with advances among active issuers.
- Share of LICs relying on auctions for more than half of domestic borrowing rose by "15 percent" (to "30" countries by 2023).
- Countries publishing issuance calendars increased by "20 percent", to "30 out of 69 LICs".
- Number issuing >80 percent of domestic borrowing through auctions remained flat at around "20" countries.
- Cancellations of planned issuances increased: LICs report cancelled auctions rising from "5" to "20 percent" share.
- Secondary market transparency limited: only "24 percent" (10 out of 41 covered) publish daily post-trade data.

Maturity structure, short-term issuance, and rollover risks
- 2024 domestic debt stock predominantly medium- and long-term ("79 percent"), but 2025 new issuance shifted toward short-term: "41 percent" of new debt (including central bank financing) at short maturities.
- Median maturity of new longer-term debt: "4.5 years" for LICs, "5 years" for frontier LICs; shorter for small economies ("2.9 years") and FCV countries ("3.6 years").
- A subset of countries consistently had elevated short-term debt: averaged "12 percent of GDP" and "44 percent" of total domestic debt between 2019 and 2023.
- Within this group, four countries had new short-term borrowing in 2023 exceeding half of their 2022 domestic debt stock.

Domestic borrowing costs, real rates, and financial repression
- Nominal rates on domestic debt reached up to "25 percent" in some LICs; median nominal rate about "5 percent" in 2024.
- Nearly half of LICs ("48 percent") record negative real domestic interest rates; median real rate close to zero in 2024.
- Negative real rates reflect inflation-driven erosion of real debt value and, in some cases, financial repression (regulatory requirements or policy incentives pushing institutions to hold government securities at below-market returns).
- Risks from financial repression: increased bank exposure to sovereign risk, crowding out private credit, distorted capital allocation.
- Moving to positive real rates would require significantly greater fiscal adjustment amid rising domestic debt.

Domestic debt service pressure and revenue capacity
- Median domestic debt service-to-revenues (including grants) increased more than five-fold: "3 percent" in 2014 → "19 percent" in 2024.
- LICs with largest domestic debt service-to-revenues typically have tax revenues-to-GDP lower than "15 percent".
- Countries with highest domestic debt burden ratios face the most pressure on domestic debt service.

Assessment through the LIC-DSF and macro-financial linkages
- Domestic financing provided benefits: financing development needs amid external shocks, enabling countercyclical responses, reducing exchange-rate risks, supporting local capital market development.
- Rising domestic debt burdens and a growing sovereign-bank nexus in some LICs create vulnerabilities requiring monitoring and management.
- LIC-DSF incorporates domestic public debt vulnerabilities into overall debt risk/sustainability assessment by evaluating domestic debt dynamics and consistency of domestic borrowing plans with macroeconomic and financial stability.
- Analysis focuses on: (i) magnitude of breaches of overall public debt burden indicator relative to external debt indicators; and (ii) levels of domestic debt, debt service, and primary balance among countries at high risk or in distress. Sovereign-bank nexus scale is also assessed.

Solvency threshold breaches and country heterogeneity
- Near-to-medium term: of 13 countries with solvency breaches, five have breaches more intense for overall debt than external debt; two exceed the in-debt distress/unsustainable median.
- Long term: of 9 countries with solvency breaches, four show more intense overall debt breaches than external debt; one overall debt breach surpasses the in-debt distress/sustainability benchmark.

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### Additional insights on vulnerabilities in high-risk and indebted LICs

Supplementary benchmarks (Supplement to 2018 LIC DSF Guidance Note)
- Benchmark indicators for domestic debt vulnerability:
  - Average domestic public debt-to-GDP: "17 percent".
  - Average domestic public debt service-to-revenue: "22 percent".
  - Primary balance-to-GDP assessed over the medium-term (first five years) used as fiscal space indicator.

Scale of vulnerabilities among LICs at high risk or in debt distress
- Among LICs at high risk of overall debt distress or in debt distress:
  - "18" countries appear particularly vulnerable (creditor composition of external debt could reduce scope for meaningful debt relief).
  - Additional "13" countries meet one or two vulnerability criteria.
- Breakdown for 2025-29 relative to LIC medians:
  - Primary balance: "Four" countries have primary deficits exceeding the median; "one" is already in debt distress.
  - Domestic debt stock: "Nine" countries have domestic debt-to-GDP exceeding the median; "three" of these are already in debt distress. Of these nine, "five" also have relatively high domestic debt service-to-revenue, and "one" has a high primary deficit-to-GDP.
  - Domestic debt service: "Ten" countries have elevated domestic debt service-to-revenue ratios; "two" are already in debt distress.
- Data gaps: "Three" countries lack complete data (Afghanistan, Eritrea, and Yemen).

Sovereign–bank–central bank nexus
- Domestic debt pressures differ from external pressures by creditor base and macro-financial linkages:
  - External pressures affect balance of payments and external financing access.
  - Domestic pressures weigh on local financial systems and private credit availability.
- Amplification channels:
  - Sovereign–bank–central bank balance-sheet linkages can amplify vulnerabilities; domestic default heightens banking crisis risk and reduces credit growth.
  - Quasi-fiscal operations and monetary financing can distort pricing, obscure sovereign risks, and undermine price stability.
  - Shallow domestic markets, limited fiscal space, and weak crisis frameworks amplify risks.
- Trends over the last decade:
  - Central bank exposures to sovereign: average rose from "27 percent" of central bank assets in 2010 → "32 percent" by 2018 → "36 percent" by 2022.
  - Domestic commercial banks increased exposure to sovereign and reduced exposure to private sector.
  - Number of LICs with domestic banks holding > a quarter of assets with the sovereign more than doubled over the last decade.
  - Number of LICs with > a quarter of banks’ assets with private sector declined over the same period.
- Causality is bidirectional: banking crises can lead to sovereign default; sovereign default implies losses for the local financial sector and reduces private financing capacity.

Evidence from domestic debt stress episodes
- Most domestic stress events coincided with or followed external debt stress; recent cases increasingly driven by single domestic pressures (arrears accumulation, monetary financing, financial repression).
- Crisis-associated features:
  - Higher domestic debt-to-GDP ratios.
  - Lower real GDP per capita growth.
  - Lower private credit-to-GDP.
- Balance-sheet characteristics during stress:
  - Central banks and domestic banks have higher sovereign exposure and lend less to private sector.
  - Central banks increase claims on domestic banks as stress builds.
  - Central banks’ net claims on non-residents are lower in stress episodes.
  - Domestic non-bank holders (e.g., pension funds) hold higher share of total debt during stress.
- Domestic stress event definition (any of):
  - (i) de jure default;
  - (ii) inflation rate above "100 percent" or at least "50 percent" and has doubled over the past year;
  - (iii) central bank claims on central government exceed "4 percent of GDP" and have more than doubled y-o-y;
  - (iv) 3-year moving average of domestic debt-to-GDP in the "67th LIC percentile" and 3-year moving average real effective domestic interest rate is negative;
  - (v) stock of domestic arrears exceeds "5 percent of GDP" for past three years and is at least "10 percent" higher than the previous year.

Key takeaways and policy-relevant observations
- Fiscal consolidation has helped curb debt growth but progress is uneven; public debt expected to stabilize at high levels and some countries remain vulnerable.
- Under baseline assumptions, systemic debt crisis risk appears broadly contained; liquidity risks have grown more prominent.
- Gross financing needs almost doubled between "2014" and "2024".
- Elevated base rates and policy uncertainty drive high funding costs and increase public debt rollover obligations.
- Increased domestic financing has benefits and costs:
  - Benefits: financing deficits, reducing exchange-rate risk.
  - Costs: higher domestic debt service burden driven by short-term debt importance and high domestic interest rates; burden highest among frontier economies and those with low domestic revenue mobilization.
- Nearly half of countries at high risk or in debt distress face domestic debt challenges (large financing needs, elevated domestic debt stock, or elevated domestic debt service burden).
- Balancing reliance on domestic financing is crucial to mitigate financial stability risks from higher banking-sector sovereign exposure.
- Continued improvements in debt transparency will support better vulnerability assessments.

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### Annex III — Gross Financing Needs and data limitations

GFN figures and patterns
- Figures presented include: Average Gross Financing Needs (% of GDP) (2014–24); regional breakdowns and drivers; GFN by income/fragility and by small-state/exporter type (averages 2014-24).
- Data source: IMF-World Bank LIC-DSF database as of end-June 2025.

Key measurement limitations for domestic public debt
- No comprehensive domestic-debt database analogous to World Bank IDS for external debt.
- Analysis relies on LIC DSAs composition/maturity data supplemented by country debt bulletins; composition data unavailable in some fragile and small states.
- No comprehensive, reliable database on domestic public debt service; series constructed using LIC DSAs to avoid inconsistent subtraction methods between external and overall debt service sources.
- Domestic arrears data derived from Bank of Canada – Bank of England Sovereign Default Database and LIC DSAs; some arrears large (exceeding "10% of GDP") but timing/size sometimes could not be validated and disputed arrears were dropped for stress identification yet retained for composition presentation.

Domestic debt stress and unsustainable indicators (Annex VI)
- Panel A and Panel B figures cover distributions and dynamic changes for domestic debt, private credit, central bank and bank claims on sovereign and private sector, non-resident net claims, and non-bank holder shares for 2000-23.
- Unsustainable domestic debt episode signals include extreme inflation (annual inflation > "400 percent"), de jure default episodes, and persistent large arrears (stock > "10 percent of GDP" for 3 consecutive years and >10 percent above prior year).
- Empirical regularities in unsustainable episodes: higher domestic debt-to-GDP, lower growth, lower credit-to-GDP, worsening central bank/net non-resident positions, and deleveraging by domestic banks.

*Italic source attribution: Chapter summary and Annex III, ppea2025038 (IMF PDF).*

### INTRODUCTION _____________________________________________________________________ 4

### INTRODUCTION

### Context and purpose
- Many Low-Income Countries (LICs) continue to face significant debt vulnerabilities and pressing financing needs amid global uncertainty. The paper provides factual data and insights on recent trends in public debt vulnerabilities and financing challenges in LICs, with a special focus on domestic debt issues.
- The term LICs is used to refer to the 69 countries that use the LIC DSF. However, LIC DSF data is available for 67 countries with a recent LIC DSA.

### Key observations on recent developments
- After a steady rise in public debt levels in the years leading up to COVID-19, the sharp increase during 2020-21 compounded by tighter global financial conditions has left many LICs burdened with growing debt service obligations that limit the fiscal space for development expenditures.
- Bank and Fund staffs’ projections under baseline assumptions suggest debt service obligations will remain elevated and above pre-pandemic peaks, with Sub-Saharan African LICs particularly burdened.
- A few countries remain particularly vulnerable to the risk that debt becomes unsustainable.
- Bolstering debt management and enhancing debt transparency is critical to sustain good creditor relations, both external and domestic.

### Shift to domestic debt financing (key statistics)
- Domestic public debt-to-GDP in LICs rose from 8 percent of GDP in 2014 to over 17 percent of GDP in 2024.
- By 2024, 80 percent of LICs issued domestic debt through local markets.
- Marketable instruments accounted for around 60 percent of domestic issuance by 2024.
- Over one-fifth of LICs now have more domestic than external debt.
- Countries with low tax revenue and high domestic debt levels face acute challenges.

### Social and developmental implications
- Elevated debt service absorbs an increasing share of scarce revenues, squeezing fiscal space for investment in education, health, and infrastructure and constraining job creation.
- In 2024, 88 million young people lived in LICs simultaneously facing the triple challenge of low revenues, high debt service, and elevated risks of debt distress. “Youth” refers to the population with an age 12-24.

### Domestic debt vulnerability metrics used
- Domestic debt vulnerabilities are analyzed through three metrics: the level of domestic public debt-to-GDP, primary deficits, and debt service-to-revenue.
- Vulnerabilities are also assessed through risks from persistent macro-financial weaknesses such as elevated banking sector exposure, reduced private credit, and low net foreign assets.

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### EVOLUTION OF PUBLIC DEBT VULNERABILITIES

#### Fiscal consolidation and public debt levels
- Fiscal consolidation has been key to curbing debt growth and mitigating sustainability risks, but progress has been uneven across countries.
- For the median LIC, the primary deficit narrowed to roughly half of its pandemic peak (in excess of 3 percent of GDP) by 2024; it is now near its pre-pandemic levels and is expected to further narrow over the medium term under staff’s baseline assumptions.
- Frontier LICs made significant gains in primary balance consolidation (albeit from a lower starting point), while fragile and conflict-affected states (FCS/FCV LICs) and commodity exporters are adjusting more modestly.
- The median SSA LIC had the largest primary deficit of any country group following the pandemic (over 4 percent of GDP) and subsequently recorded a consolidation of more than 2½ percent of GDP between 2022 and 2024.

#### Current public debt status and risk assessment
- Public debt levels are expected to stabilize or marginally decline but remain above their pre-pandemic peak (at 49 percent of GDP by end 2024).
- Since 2018, the median SSA LIC has recorded the highest public debt-to-GDP levels among peers.
- Out of 69 LICs in the note’s perimeter, only 10 countries are in debt distress or have unsustainable public debt. Based on LIC-DSF risk ratings available as of June 2025, these countries are Republic of Congo, Djibouti, Ethiopia, Grenada, Lao PDR, Malawi, Maldives, Sao Tome and Principe, Sudan, and Zimbabwe. In addition, Eritrea (no recent LIC DSA) has protracted arrears with multilateral creditors; Yemen has arrears with official bilateral creditors.
- The share of countries assessed at high risk of external debt distress briefly increased at the onset of the pandemic but has steadily improved since 2021, with the share now six percentage points lower.
- FCS/FCV and Small Developing States (SDS) report the largest share of high-risk external debt distress ratings (over 45 percent), while SSA and Commodity Exporter countries record the lowest incidence (less than 1/3 and 1/4, respectively).

#### Liquidity versus solvency dynamics
- Liquidity risks have become more prominent. An assessment of LIC-DSF threshold breaches shows a higher share of high-risk ratings triggered by breaches of liquidity indicators only (debt service to revenue or debt service to exports) over the last four years.
- The analysis underscores the importance of continuous monitoring of liquidity constraints to prevent liquidity pressures from evolving into solvency problems.

#### Uncertainties and data limitations
- Risks that could worsen the outlook include setbacks in global growth, shifts in international financial conditions, reduced flows in official aid, exchange rate volatility, weaker-than-expected domestic reforms, or multiple shocks.
- Limitations in debt data and gaps in debt transparency may lead to underestimation of debt challenges:
  - Public debt reporting in LICs has improved; the share of countries producing debt bulletins has grown over the last 5 years.
  - In 2024, less than 25 percent of LICs (mostly FCS/FCV) had not published any debt data over the previous two years, compared to 40 percent in 2021.
  - Only one in four countries reports loan level information on newly contracted debt.
  - Comprehensive sectoral coverage remains rare; subnational borrowing, contingent liabilities, and state-owned enterprise debt are often excluded from official tabulations.
  - As instruments grow more complex and shift beyond the central government, failure to expand debt coverage across the public sector will raise the risks of “hidden debts.”

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### ELEVATED DEBT SERVICE OBLIGATIONS, FINANCING NEEDS, AND NET FLOWS

- Gross financing needs (GFNs) in LICs have almost doubled between 2014 and 2024.
  - Median GFNs rose from 4 percent of GDP in 2014 to about 8 percent of GDP by 2024.
  - The most significant shift occurred between 2019 and 2022, by almost 4 percentage points of GDP, reflecting the fiscal impact of the COVID-19 pandemic.
  - The GFN level in 2024 remains 70 percent higher than a decade ago.
- GFNs are higher in Frontier economies and commodity exporters, and in many are driven by high public domestic debt service.
- Refinancing requirements are projected to exceed $35 billion annually through 2028.
- These pressures underscore the need for continued fiscal discipline, greater domestic resource mobilization efforts, growth-enhancing reforms, enhanced access to sustainable financing, and improved debt transparency to mitigate the risk that liquidity pressures evolve into broader solvency problems.

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*Source: INTRODUCTION, DEBT VULNERABILITIES IN LICs: RECENT DEVELOPMENTS AND TRENDS (October 10, 2025).*

### 13.      Elevated funding costs continue weighing on public debt rollover obligations amid

### 13.      Elevated funding costs continue weighing on public debt rollover obligations amid policy uncertainty

### Global funding conditions and bond spreads
- Global financial conditions tightened sharply in 2022 as central banks in advanced economies responded to persistent post-COVID-19 inflationary pressures and accompanied a rise in EMDE bond spreads.
- As volatility subsided, spreads have broadly retraced to near pre-pandemic lows for most countries and the share of countries trading at distressed levels (>1000 bps) has continued to decline—falling from nearly 10 percent a year ago to under 5 percent by end-August 2025.
- Nevertheless, notwithstanding the reduction in spreads, the still-high benchmark rates mean funding costs remain elevated, compared to the pre-COVID-19 period.
- Figure 6: LIC Bond Spreads and Underlying Yields (Sources: Bloomberg, JP Morgan, and Fund staff calculations; Note: As of July 31, 2025. RHS chart includes only frontier low-income countries.)

### Debt service burdens and fiscal crowding-out
- Debt service burdens have sharply increased across all LIC country groups and are constraining countries’ capacity to finance critical development needs and build buffers.
- Rising obligations on both interest and amortization are particularly acute among SSA and Commodity Exporter LICs.
- The public external debt service-to-revenue ratio (excluding grants) in the median frontier LIC and the median SSA LIC has remained persistently above that of the median LIC; in 2024, these ratios were over one-third higher than the median LIC.
- Interest payments on total public debt (external and domestic) have more than doubled from around US$13 billion in 2014 to US$35 billion in 2024.
- For frontier LICs, the interest-to-revenue ratio was almost twice as large as that of the median LIC in 2024.
- The median SSA LIC saw an interest-to-revenue ratio of nearly 11 percent in 2024—close to one third higher than that of the median LIC—and SSA LICs along with Commodity Exporters have consistently recorded the highest interest-to-revenue ratios among all subgroups since 2014.
- While this ratio is projected to decline over the forecast period, staff expect the median SSA LIC to continue to experience significantly higher interest-to-revenue ratios than the median LIC.
- Figure 7: Overall Interest to Revenue and External Debt Service to Revenue (Sources: IMF World Economic Outlook April 2025 and World Bank International Debt Statistics 2024; Note: Revenues excluding grants. External debt service based on 2024 IDS. IQR: interquartile range.)

### External refinancing needs and creditor composition
- External principal payments are estimated to have exceeded US$34bn in LICs in 2024, more than quadruple the comparable figure a decade earlier.
- Over three-fourths of these payments were due to official creditors, with most of the remainder due to commercial lenders, reflecting the shift in creditor composition over the last decade.
- For 2025-28, LICs’ external refinancing needs over the medium term are set to remain elevated during the remainder of the decade.
- In the next few years, average annual gross flows of about US$40 billion per year to LICs will be needed just to maintain exposure to these countries.
- Figure 8: External Public and Publicly Guaranteed Principal Payments, By Creditor Type (USD bn) (Sources: World Bank International Debt Statistics 2024 and IMF-World Bank LIC-DSF database; Note: 2024 are IDS projections based on 2023 external debt stocks. Countries currently undergoing a debt restructuring are excluded.)
- Figure 9: Public External Financing Supply and Needs (USD bn) (Sources: Fund staff calculations, World Bank International Debt Statistics 2024, and IMF-World Bank LIC-DSF database; Note: Countries currently undergoing debt restructuring are excluded.)

### Evolution of public domestic debt: levels and recent trends
- Public domestic debt in LICs rose from 8 percent of GDP in 2014 to 12 percent in 2019, further increasing to 17 percent in 2024.
- The median LIC raised its share of public domestic debt by 10 percentage points between 2014 and 2024.
- The share of countries with public domestic debt being more than half of their total public and publicly guaranteed debt more than doubled from 10 percent in 2014 to 21 percent in 2024.
- Some frontier LICs (example countries cited in source) were able to issue local currency bonds at maturities equal or longer than 15 years.
- The pandemic amplified reliance on domestic borrowing, particularly for SSA, frontier LICs, and FCS/FCV LICs: in frontier LICs the median level of domestic debt increased from 15 to 20 percent of GDP over the 2019-21 period.
- Since 2021, the post-pandemic surge has been driven by SSA and FCS/FCV countries, where the public domestic debt burden rose by 2 and 6 percentage points of GDP, respectively—compared with 0.9 percentage points in the median LIC.
- Figure 10: Evolution of Domestic Public Debt-to-GDP in LICs (median) (Source: IMF-World Bank LIC-DSF database as of June 2025.)
- Figure 11: Share of Domestic Public Debt in LICs (Source: IMF-World Bank LIC-DSF database as of June 2025.)

### Domestic debt service and composition
- Domestic debt service more than doubled from 2.1 percent of GDP in 2014 to 4.7 percent of GDP in 2024.
- As of end-2024, about 59 percent of the stock of public domestic debt is in marketable securities (mainly T-bills and T-bonds, with a marginal share of sukuk), 24 percent in non-marketable debt such as loans and central bank financing, and 17 percent in arrears.
- Among the 60 countries considered, 80 percent issue marketable debt; of those that do not, about two-thirds are FCS/FCV and the remaining are small states.
- The share of marketable debt is highest in South Asia (SAR) and Europe and Central Asia (ECA), while non-marketable debt is dominant in East Asia Pacific (EAP) and Latin America and Caribbean (LAC).
- Figure 12: Composition of Public Domestic Debt in 2024 (average shares): Marketable 59.1%, Non-Marketable 24.3%, Arrears 16.6%; T-bills 21.4%, T-bonds 37.4%, Sukuk 0.3%, Loans 11.9%, Central Bank 7.2%, Guarantees 0.7%, SOE debt 0.6%, Other 4.0%.
- Note on data coverage: Data on public domestic debt composition covers 60 out of the 69 countries under the LIC DSF; nine countries excluded due to lack of published data or sufficiently detailed data.

### Domestic debt transparency developments (Box 1)
- Domestic debt transparency in LICs has improved since 2020 according to the World Bank’s annual assessment, with notable advances among active issuers.
- The share of LICs relying on auctions for more than half of their domestic borrowing rose by 15 percent (to 30 countries by 2023).
- The number of countries publishing issuance calendars increased by 20 percent, to 30 out of 69 LICs.
- However, weaknesses persist: the number of LICs issuing more than 80 percent of their domestic borrowing through auctions has remained flat since 2020 at around 20 countries.
- Cancellations of planned issuances have increased with LICs reporting from 5 to 20 percent of the share of cancelled auctions.
- Secondary market transparency remains limited: only 24 percent (10 countries out of 41 covered by the assessment) publish daily post-trade data.
- Distribution of LICs by Share of Domestic Debt Issued Through Auctions (used as proxy for debt transparency) noted; assessment covers five main areas of transparency and predictability.

### Maturity structure, rising short-term issuance, and rollover risks
- The 2024 stock of domestic debt was predominantly medium- and long-term (79 percent), but new issuance in 2025 shows a shift toward short-term borrowing, with 41 percent of new debt (including central bank financing) issued at short maturities.
- Median maturity of new longer-term debt: 4.5 years for LICs and 5 years for frontier LICs; significantly shorter for small economies (2.9 years) and FCV countries (3.6 years).
- A subset of countries consistently maintained elevated short-term debt, averaging 12 percent of GDP and 44 percent of total domestic debt between 2019 and 2023.
- Within this group, four countries had new short-term borrowing in 2023 exceeding half of their 2022 domestic debt stock, amplifying rollover pressures and interest rate risks.

### Domestic borrowing costs, real rates, and financial repression concerns
- Nominal rates on domestic debt reached up to 25 percent in some LICs, with the median at about 5 percent in 2024.
- Nearly half of LICs (48 percent) record negative real domestic interest rates, with the median close to zero in 2024.
- Negative real rates partly reflect the global inflationary spike that inflated away the real value of existing debts; in some cases, persistently negative real rates reflect financial repression (regulatory requirements or policy incentives pushing domestic institutions to absorb government securities at below-market returns).
- Risks of financial repression include bank balance sheets increasingly exposed to sovereign risk, crowding out of private sector credit, and distorted capital allocation.
- Moving toward positive real rates would require significantly greater fiscal adjustment in the context of rising domestic debt.

### Domestic debt service pressure and revenue capacity
- The median domestic debt service-to-revenues (including grants) increased more than five-fold from 3 percent in 2014 to 19 percent in 2024.
- LICs with the largest domestic debt service-to-revenues also have tax revenues-to-GDP lower than 15 percent.
- Countries with the highest domestic debt burden ratios also face the most pressure on domestic debt service.
- Figures: Figure 13 (Average Nominal Interest Rate on Domestic Debt, 2024), Figure 14 (Distribution of Real Domestic Interest Rates in 2024), Figure 15 (Evolution of Domestic Public Debt Service-to-Revenues, Median), Figure 16a and 16b (Domestic Public Debt Service-to-Revenues, 2024 versus Tax Revenues-to-GDP and versus Domestic Public Debt-to-GDP). (Sources: IMF-World Bank LIC-DSF database as of end-June 2025 / June 2025 as noted.)

### Assessment through the LIC-DSF and macro-financial linkages
- Domestic financing has provided benefits: financing development needs amid external shocks, enabling countercyclical responses, reducing exchange rate risks, and supporting local capital market development.
- However, increasing domestic debt burdens and a growing sovereign-bank nexus in some LICs suggest vulnerabilities need careful monitoring and management.
- The LIC-DSF accounts for public domestic debt vulnerabilities in the overall debt risk and sustainability assessment, considering dynamics of domestic public debt indicators and consistency of domestic public borrowing plans with macroeconomic and financial stability.
- Analysis focuses on: (i) magnitude of breaches of overall public debt burden indicator relative to external debt burden indicators; and (ii) level of domestic debt, debt service, and primary balance among countries at high risk of overall debt distress or in distress. The scale of the sovereign-bank nexus is also important.

### Solvency threshold breaches and country heterogeneity
- In the near-to-medium term, of the 13 countries exhibiting breaches of solvency thresholds, five present breaches of higher intensity for overall debt than external debt, with two countries exceeding the in-debt distress/unsustainable median.
- In the long term, of the 9 countries exhibiting a breach of solvency thresholds, four show more intense breaches of overall debt than external debt, with one overall debt breach surpassing the in-debt distress/sustainability benchmark.
- Figure 17: Maximum Average Solvency Breaches (a. Near-to-Medium Term; b. Medium-to-Long Term) (Source: IMF-World Bank LIC-DSF database; Notes: medians computed separately for high-risk sustainable and debt-distress unsustainable countries; methodology described for calculating maximum average positive breaches.)

*Italic source attribution: Chapter 13, "Elevated funding costs continue weighing on public debt rollover obligations amid policy uncertainty", ppea2025038 (IMF PDF).*

### 28.      Additional insights on the scale of vulnerabilities in countries assessed at high risk of

### 28.      Additional insights on the scale of vulnerabilities in countries assessed at high risk of overall debt distress or in debt distress

### Supplementary metrics to assess domestic debt vulnerabilities
- The Supplement to the 2018 LIC DSF Guidance Note identifies benchmarks indicative of domestic debt vulnerability:
  - "17 percent" for the average domestic public debt-to -GDP ratio.
  - "22 percent" for the average domestic public debt service-to -revenue ratio.
- A third metric is used to indicate potential fiscal space constraints:
  - Primary balance-to -GDP (assessed over the medium-term, i.e., the first five years of the forecast period).

### Scale of domestic debt vulnerabilities among LICs at high risk or in debt distress
- Among LICs either in high risk of overall debt distress or in debt distress:
  - "18" countries appear particularly vulnerable (note: in these 18 countries, creditor composition of external debt could reduce scope for meaningful debt relief).
  - An additional "13" countries meet one or two of the vulnerability criteria.
- Breakdown of vulnerabilities (over the next 5 years, 2025-29, relative to LIC medians):
  - Primary balance:
    - "Four" countries have primary deficits exceeding the median of the distribution in 2025-29 for LICs, of which "one" is already in debt distress.
  - Domestic debt stock:
    - "Nine" countries have domestic debt-to -GDP exceeding the median over the next 5 years, of which "three" are already in debt distress.
    - Of these nine, "five" also have a relatively high domestic debt service-to -revenue ratio, and "one" has a high primary deficit-to -GDP.
  - Domestic debt service:
    - "Ten" countries have elevated domestic debt service-to -revenue ratios, of which "two" are already in debt distress.
- Note: "Three" other countries have no complete data (Afghanistan, Eritrea, and Yemen).

### Domestic debt and the sovereign–bank–central bank nexus
- Domestic debt pressures differ from external debt pressures by creditor base and macro-financial linkages:
  - External debt pressures affect balance of payments and external financing access.
  - Domestic debt pressures can weigh on the local financial system, impeding private sector credit and limiting growth.
- Amplification channels and risks:
  - Sovereign–bank–central bank balance-sheet linkages can amplify vulnerabilities: domestic default heightens banking crisis and financial instability risks, with spillovers to credit growth.
  - Quasi-fiscal operations and monetary financing can distort pricing, obscure sovereign risks, and undermine price stability.
  - Shallow domestic financial markets, limited fiscal space, and weak crisis management frameworks can amplify these risks.
- Trends in exposures over the last decade:
  - Central bank exposures to the sovereign increased (see Figure 19):
    - Exposure rose from an average of "27 percent" of central banks assets in 2010 to "32 percent" by 2018, then to "36 percent" by 2022.
  - Domestic commercial banks in LICs have on average increased exposure to the sovereign and reduced exposure to the private sector (see Figure 20).
  - The number of LICs with domestic banks having more than a quarter of their assets with the sovereign more than doubled over the last decade (see Figure 21).
  - Over the same period, the number of LICs with more than a quarter of banks’ assets with the private sector declined (see Figure 22).
- Causality along the sovereign–banking nexus is bidirectional:
  - Banking crises can lead to sovereign defaults as demand for domestic debt recedes.
  - Sovereign defaults imply asset losses for the local financial sector, risking citizens’ deposits and reducing private financing capacity.

### Evidence from domestic debt stress episodes (Box 2)
- Improved data show most domestic stress events have coincided with or followed external debt stress; recent cases increasingly driven by single domestic pressures (accumulation of arrears, monetary financing, financial repression).
- Crisis-associated features (compared to non-crisis events):
  - Higher domestic debt-to -GDP ratios.
  - Lower growth rates of real GDP per capita.
  - Lower private credit-to -GDP ratios.
- Balance sheet characteristics during domestic debt stress episodes:
  - Both central banks and domestic banks have fundamentally higher exposure to the sovereign and lend less to the private sector.
  - Central banks increase claims on domestic banks as domestic debt stress builds up.
  - Central banks’ net claims on non-residents are lower in domestic debt stress episodes than in non-stress events.
  - Domestic non-bank holders (e.g., pension funds) tend to have a higher share of total debt during domestic debt stress episodes.
- Definition used for a domestic stress event (any of the following):
  - (i) a de jure default;
  - (ii) inflation rate above "100 percent" or at least "50 percent" and has doubled over the past year (inflation spike);
  - (iii) central bank claims on central government exceed "4 percent of GDP" and has more than doubled (y-o-y) (excessive monetary financing);
  - (iv) the 3-year moving average of domestic debt-to -GDP is in the "67th LIC percentile" and the 3-year moving average of real effective domestic interest rate is negative (financial repression);
  - (v) the stock of domestic arrears exceeds "5 percent of GDP" for past three years and is at least "10 percent" higher than the previous year.

### Key takeaways and policy-relevant observations
- Fiscal consolidation has helped curb debt growth, but improvement has been uneven; public debt is expected to stabilize at high levels, and some countries remain vulnerable.
- Under baseline assumptions, risks of a systemic debt crisis appear broadly contained, while liquidity risks have become relatively more prominent.
- Gross financing needs almost doubled between "2014" and "2024".
- Elevated base rates and policy uncertainty contribute to high funding costs, increasing public debt rollover obligations.
- Increased reliance on domestic financing has benefits (financing deficits, reduced exchange rate risk) and costs:
  - Higher domestic debt service burden driven by short-term domestic debt importance and high domestic interest rates.
  - Burden highest among frontier economies and those with low domestic revenue mobilization.
- Among countries with high risk of overall debt distress and in debt distress, nearly half face domestic debt challenges (large fiscal financing needs, elevated domestic debt stock, or elevated domestic debt service burden).
- Importance of balancing reliance on domestic financing to mitigate financial stability risks from higher banking sector exposure to the sovereign.
- Continued efforts to improve debt transparency would support better assessments of debt vulnerabilities.

*Source: IMF and World Bank (content from the IMF chapter titled "Additional insights on the scale of vulnerabilities in countries assessed at high risk of overall debt distress or in debt distress").*

### Annex III . Gross Financing Needs

### Annex III . Gross Financing Needs

### Average and regional GFN patterns (Figures AIII.1–AIII.4)
- Figures reported:
  - Figure AIII.1. Average Gross Financing Needs (% of GDP) (2014–24)
  - Figure AIII.2. Regional Breakdown of GFN and Its Drivers (% of GDP) (average: 2014-24)
  - Figure AIII.3. GFN and Its Drivers by Income Level and Fragility (average: 2014-24)
  - Figure AIII.4. GFN and Its Drivers by Small-State and Exporter Type (average: 2014-24)
- Data source for figures: IMF-World Bank LIC-DSF database as of end-June 2025.

### Key measurement limitations for domestic public debt (Annex IV)
- Domestic public debt composition:
  - No comprehensive database comparable to the World Bank’s International Debt Statistics for external debt.
  - Analysis relies on information in LIC DSAs on composition and maturity by origin of debt instruments, supplemented by debt bulletins published by countries’ governments.
  - Composition data remain unavailable in some fragile and conflict-afflicted states and small states.
- Debt service:
  - No comprehensive and reliable database on domestic public debt service.
  - IMF WEO and World Bank Macro Poverty Outlooks (MPOs) report overall interest payments and amortizations (with some gaps).
  - Domestic debt service could be derived by subtracting external debt service from overall public debt service, but doing so risks inconsistent series due to differing primary data sources (WB’s DRS/IDS for external debt service versus WEO/MPOs for overall debt service).
  - This analysis builds a historical database on debt service using data included in the LIC DSAs.
- Domestic arrears:
  - Arrears used are extracted from the Bank of Canada – Bank of England Sovereign Default Database and LIC DSAs.
  - Some domestic arrears are large, exceeding 10% of GDP, justifying their use as a signal for domestic debt stress episodes.
  - During WB and IMF data validation, size and timing of accumulation of some arrears could not be validated by some country teams; accuracy of arrears data remains a concern.
  - Arrears disputed by country teams were dropped for identifying domestic debt stress episodes, while they were retained for presentation of domestic debt composition.

### Composition of domestic debt in 2024 (Annex V)
- Figures reported:
  - Figure AV.1. By Regions (Percent of total)
  - Figure AV.2. By Lending (Percent of total)
  - Figure AV.3. By Income (Percent of total)
  - Figure AV.4. By Structural Features (Percent of total)
- Legend and categories used in charts:
  - Regions: EAP, ECA, LAC, MNA, SAR, SSA (as displayed)
  - Lending types: IBRD, IDA-only, Blend (as displayed)
  - Income groups: HIC, LIC, L-MIC, U-MIC (labels preserved as in figures)
  - Structural features: Marketable, Non-Marketable, Arrears (percent of total)
- Data sources for figures: LIC DSAs, debt bulletins of national authorities, and Bank of Canada – Bank of England database of sovereign defaults.

### Domestic debt stress and unsustainable domestic debt indicators (Annex VI)
- Domestic debt stress (Panel A):
  - Figures include distributions and boxplots for:
    - Domestic Debt-to-GDP
    - Private Credit-to-GDP
    - Central Banks’ Net Claims on Non-Residents
    - Total Debt Share of Domestic Non-Bank Holders
    - Central Banks’ Claims on the Sovereign from t-5 to Crisis
    - Domestic Banks’ Claims on the Sovereign from t-5 to Crisis
    - Domestic Banks’ Claims on the Private Sector from t-5 to Crisis
    - Total Debt Share of Domestic Non-Bank Holders from t-5 to Crisis
    - Central Banks’ Net Claims on Non-Residents from t-5 to Crisis
    - Domestic Banks’ Net Claims on Non-Residents from t-5 to Crisis
  - Sample period: 2000-23 for LIC-DSF countries (boxplot conventions: 25th (Q1) to 75th (Q3) percentile range, median line, whiskers at 1.5 × IQR, outliers plotted as circles).
  - Data sources cited: WB staff and IFS.
- Unsustainable domestic debt (Panel B) — robustness findings:
  - Unsustainable domestic debt episodes defined to include any of the following signals:
    - (i) Inflation spikes with the annual inflation rate exceeding 400 percent;
    - (ii) De jure default episodes (Erce et al.(2022), IMF);
    - (iii) The stock of domestic arrears exceeds 10 percent of GDP for 3 consecutive years and exceeds 10 percent of the previous year’s domestic arrears, cross-checked with DSA ratings.
  - Empirical regularities in domestic default episodes (compared to non-crisis events):
    - LICs have higher domestic debt-to-GDP ratios.
    - LICs have lower GDP growth rates.
    - LICs have lower credit-to-GDP ratios.
    - Monetary conditions are worse: central banks’ monetary base is a higher share of total assets and total liabilities, and this share increases as default approaches.
    - Central banks are overly exposed to the sovereign both due to long-term fundamentals and crisis dynamics.
    - Domestic banks undertake deleveraging from both the public and private sectors as pressure builds up.
    - Central bank interventions in unsustainable episodes are clearer on the liability side: central banks’ liabilities to domestic banks are higher, increasing as pressure builds up.
    - Net positions on non-residents for both central banks and domestic banks deteriorate in unsustainable domestic debt episodes.
  - Figures reported under Panel B:
    - Figure AVI.B.1 Central Banks’ Monetary Base Money
    - Figure AVI.B.2 Central Banks’ Monetary Base from t-5 to Crisis
    - Figure AVI.B.3 Central Banks’ Claims on the Sovereign
    - Figure AVI.B.4 Central Banks’ Claims on the Sovereign from t-5 to Crisis
    - Figure AVI.B.5 Domestic Banks’ Claims on the Sovereign
    - Figure AVI.B.6 Domestic Banks’ Claims on the Sovereign from t-5 to Crisis
    - Figure AVI.B.7 Domestic Banks’ Claims on the Private Sector
    - Figure AVI.B.8 Domestic Banks’ Claims on the Private Sector from t-5 to Crisis
    - Figure AVI.B.9 Central Banks’ Liabilities to Domestic Banks
    - Figure AVI.B.10 Central Banks’ Liabilities to Domestic Banks from t-5 to Crisis
    - Figure AVI.B.11 Central Banks’ Net Claims on Non-Residents
    - Figure AVI.B.12 Domestic Banks’ Net Claims on Non-Residents
  - Notes for Panel B figures mirror Panel A conventions and sample period (2000-23), with data sources WB staff and IFS.

*Source: ppea2025038 - Annex III . Gross Financing Needs; data and figures use IMF-World Bank LIC-DSF database as of end-June 2025, LIC DSAs, debt bulletins of national authorities, and Bank of Canada – Bank of England database of sovereign defaults.*

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_Source: https://www.imf.org/-/media/files/publications/pp/2025/english/ppea2025038.pdf_