Raad Mahmoud Al-Tal

The real cost of rising borrowing is not limited to the interest governments and businesses pay. Its deeper economic cost lies in the opportunities forgone when debt servicing begins to compete with investment, development, and the provision of essential public services. With global growth projected to slow to 2.6%, the energy shock is adding to these pressures by raising financing costs and increasing volatility in international capital flows.

For energy-importing economies, higher prices translate into larger import bills and mounting pressure on external balances. At the same time, rising energy costs feed into production, transportation, and consumer prices. When these pressures coincide with more expensive borrowing, governments face a difficult combination of external imbalances, tighter fiscal conditions, and slowing economic activity. Revenue growth may weaken just as financing needs increase, forcing governments to borrow at higher costs to meet existing obligations and support their economies.

Yet the most consequential effect of mounting debt may be what it does to investment. Borrowing is not inherently harmful. When directed towards productive infrastructure, industrial development, energy security, education, and technology, it can strengthen an economy’s capacity to generate income and sustain future growth. The critical question is whether borrowed resources create sufficient economic value to justify their cost.

The problem arises when an increasing share of public resources is absorbed by interest payments on accumulated debt, without a corresponding expansion in productive capacity. In such circumstances, governments have less room to invest in the future and become increasingly dependent on new borrowing to meet existing commitments. Debt then risks becoming more than a financing instrument. It can evolve into a structural constraint on economic development.

Recent global figures illustrate the scale of this challenge. Developing countries paid approximately $384 billion in interest on their external debt in 2024. Between 2014 and 2024, government interest payments rose by 102%, while government revenues increased by only 39%. Moreover, fiscal space narrowed in 73% of developing countries between 2018 and 2024. These figures point to a growing imbalance between the cost of servicing debt and governments’ capacity to mobilise revenue. They also highlight the opportunity cost of debt: resources directed towards interest payments cannot simultaneously be used to expand infrastructure, improve public services, or strengthen the productive foundations of growth.

The challenge is compounded by the expected decline in official development assistance, projected to fall by around 7% in 2026 for the third consecutive year. For countries that depend on external support to finance development priorities, this means fewer concessional resources precisely when access to market-based financing is becoming more expensive and less predictable.

The implications extend well beyond fiscal sustainability. Persistent underinvestment in infrastructure, education, and technology weakens productivity, limits job creation, and constrains export competitiveness. Over time, this can create a self-reinforcing cycle in which higher borrowing costs reduce investment, weaker investment undermines growth, slower growth limits revenue generation, and declining fiscal capacity makes debt harder to service. The danger is that debt incurred to support development eventually undermines the very growth needed to repay it.

Breaking this cycle requires more than indiscriminate cuts in borrowing. It requires a fundamental shift in how public debt is managed and deployed. Governments must prioritise borrowing that expands productive capacity, raises economic returns, and generates sustainable future revenues. They must also improve debt maturity management, diversify financing sources, strengthen domestic revenue mobilisation, and secure greater access to concessional financing for vulnerable economies. Equally important is the need to assess public investment not merely by the amount spent, but by its contribution to productivity, employment, exports, and long-term fiscal capacity.

The central question is not simply how much debt an economy can sustain, but what that debt delivers. Financing should serve as a bridge to higher productivity and stronger growth, not become a mechanism through which an increasing share of national income is diverted away from future development. Sustainable growth is not measured by a country’s ability to borrow more, but by its ability to turn borrowed resources into productive assets, higher incomes, and greater resilience to economic shocks.