Shepherd Outsourcing opened its doors in 2021, and has been providing great services to the ARM industry ever since.
About
Address
©2024 by Shepherd Outsourcing.
Are countries spending more on debt than they can afford? Debt servicing costs, the money a country spends on repaying interest and principal on its debt, play a huge role in shaping its economy. With global interest rates stabilizing after years of fluctuation, some countries are struggling with rising debt burdens while others are keeping costs under control.
Take Nigeria, for example. In the first nine months of 2024, the country spent 63.56% of its $5.63 billion foreign payments on debt servicing, a sharp increase from 46.71% in the same period of 2023. Meanwhile, Qatar has taken a different approach. Its debt reduction strategies are expected to keep debt servicing costs below 5% of government revenues by 2027.
These numbers tell two very different stories. How are other countries managing their debt? What does it mean for their economies going forward? Let’s break down the latest global debt servicing trends and see where different nations stand in 2025.
The cost of servicing debt varies widely between countries and is influenced by a mix of economic, financial, and policy-driven factors. Here are the key elements that determine how much a nation spends on repaying its debt:
Global interest rates play a major role in determining debt servicing costs. When rates are high, borrowing becomes more expensive, increasing the interest payments on both new and existing debt. Countries with variable-rate debt are particularly vulnerable, as even a small rate hike can significantly raise their repayment burden.
A country’s debt level relative to the size of its economy is a crucial indicator of its ability to manage repayments. Nations with high debt-to-GDP ratios often face higher borrowing costs as investors perceive them as riskier. For example, Japan's debt-to-GDP ratio is estimated at approximately 263% as of January 2025, one of the highest among developed nations. However, due to its strong domestic investor base and low interest rates, Japan manages relatively low servicing costs compared to emerging economies with much lower ratios.
Countries that borrow in foreign currencies can see their debt servicing costs fluctuate based on exchange rate movements. If a country’s currency weakens against the currency in which its debt is denominated, repayment becomes more expensive. For instance, Argentina's debt crisis has been exacerbated by the peso's depreciation, making dollar-denominated debt increasingly costly to service.
Stronger economic growth can make debt easier to manage by boosting government revenues through higher tax collections. Countries experiencing rapid GDP growth can afford to allocate a smaller percentage of their income to debt servicing, freeing up funds for development and social programs.
On the other hand, stagnant or contracting economies struggle to generate the revenue needed to meet their obligations, increasing the risk of default or restructuring.
Credit rating agencies like Moody’s, S&P, and Fitch assess a country’s ability to repay its debt. A high credit rating means lower perceived risk, allowing a country to borrow at lower interest rates.
Countries with downgraded credit ratings often see borrowing costs rise, making debt servicing more expensive. A notable example is Sri Lanka, which faced soaring debt costs after credit downgrades signaled financial distress, leading to a default in April 2022.
Each of these factors interacts with the others, forming a country’s overall debt servicing burden. These influences help explain why some economies manage their debt with ease while others struggle with mounting financial pressure. Let’s look at the debt servicing costs of top economies in 2025.
Debt servicing varies widely across nations due to differences in economic structures, fiscal policies, and monetary conditions. Below is a comparative analysis of major economies in 2025.
The U.S. faces rising debt servicing costs due to years of fiscal expansion. The national debt has increased by $5 trillion since 2023, pushing government borrowing to new highs. Higher interest rates have made servicing this debt more expensive, which is adding pressure to the federal budget. However, the U.S. benefits from the dollar’s role as the global reserve currency, keeping borrowing costs relatively stable.
Borrowing costs vary within the European Union. Germany has kept debt servicing low thanks to careful financial management. France and Italy, however, are facing increasing debt burdens. Investors are particularly concerned about France, where borrowing costs have climbed in response to fiscal challenges. The European Central Bank (ECB) plays a role in managing rates, but national policies still create significant differences in debt obligations.
China’s debt is significant, but the government controls much of the financial system, allowing it to restructure debt more easily than market-driven economies. While borrowing costs remain moderate, rising global interest rates are a challenge, and China must manage its debt carefully to avoid long-term economic strain.
Japan has the highest debt-to-GDP ratio among developed nations, yet it has managed to keep debt servicing costs relatively low due to ultra-low interest rates. The challenge going forward is whether Japan can maintain its low borrowing costs as global interest rates rise.
Emerging markets with high levels of foreign currency debt are particularly vulnerable to rising interest rates. Many of these countries are already struggling to meet their debt obligations. In 2022, developing nations spent a record $443.5 billion on public debt servicing, diverting funds from essential services like healthcare and infrastructure. This trend highlights the urgent need for better debt management and possible relief measures.
In 2025, global debt dynamics are influenced by several critical factors:
Despite a slowdown in central bank rate hikes, borrowing costs remain higher than pre-pandemic levels. Developing countries, particularly in Africa, face borrowing rates up to four times higher than those of the United States and eight times higher than Germany, making it challenging to fund essential investments.
Governments are implementing fiscal reforms, including tax increases and spending cuts, to manage rising debt servicing burdens. However, these measures often come with trade-offs, as excessive austerity can slow economic growth and spark public discontent.
Countries with debt denominated in foreign currencies are prioritizing currency stability to avoid ballooning repayment costs. For instance, some nations have negotiated "pause clauses" in debt agreements, allowing them to suspend payments during disaster periods, highlighting efforts to maintain debt sustainability amid currency volatility.
The International Monetary Fund (IMF) and World Bank are increasingly involved in assisting debt-laden countries. For example, in 2023, the IMF and World Bank approved $4.5 billion in debt relief for Somalia, reducing its external debt from 64% of GDP in 2018 to less than 6% by the end of 2023.
These institutions continue to support debt relief and restructuring efforts, though discussions are ongoing to make these measures more effective and supportive of long-term growth.
Debt servicing costs in 2025 continue to shape global economic policies. Higher interest rates, shifting fiscal strategies, and currency fluctuations are forcing both developed and emerging economies to rethink their debt management approaches. While nations like the U.S. and Japan benefit from stable investor confidence, many emerging markets are grappling with rising repayment burdens that could slow growth and strain public finances. Sustainable borrowing, economic resilience, and sound fiscal policies will be key to navigating this evolving landscape.
Effective debt management is just as critical for businesses and individuals. Without the right strategy, debt can quickly become overwhelming. Shepherd Outsourcing Services helps ease this burden by negotiating better terms with creditors, crafting personalized debt management plans, and ensuring legal compliance. Our expert guidance reduces financial stress and helps clients regain control of their finances.
Schedule a free consultation today and take the first step toward financial stability.
©2024 by Shepherd Outsourcing.