South Asia is moving closer to a structural debt crisis, not a cyclical squeeze, as fresh data from the World Bank’s International Debt Report 2024 shows the region’s external liabilities rising against a backdrop of negative net inflows, record interest payments, and deepening social distress. Across 2022–24, developing countries paid US$741 billion more in principal and interest than they received in new financing — the largest such gap in at least 50 years. Several of the hardest-hit economies are in South Asia.

The report shows that the combined external debt of low- and middle-income countries reached an all-time high of US$8.9 trillion in 2024, with South Asia contributing a fast-growing share. Total external debt in the region exceeded US$685 billion in 2023, an increase driven overwhelmingly by a spike in private nonguaranteed (PNG) debt, which jumped 13% in a single year — the fastest across all developing regions. Debt service obligations continued to rise sharply: long-term principal repayments hit US$121 billion in 2023, further squeezing countries already battling currency depreciation and inflation.

Pakistan: Debt Payments Surge, Multilaterals Plug the Gaps

Pakistan’s numbers illustrate the region’s worsening vulnerability. Its external debt stock rose 4.7% to US$130.2 billion in 2023, even as the country struggled to unlock IMF support and maintain reserves. Crucially, the composition shifted towards costlier borrowing:

• World Bank disbursements surged 117%, offsetting declines in inflows from other creditors.
• External bond inflows collapsed: repayments and repurchases exceeded new bond money.
• PNG debt climbed to 38% of total external debt, leaving the country exposed to foreign-currency liabilities held by private firms.

Despite earlier restructuring steps, Pakistan’s LT principal repayments reached US$13.5 billion, while interest payments continued to climb — a mismatch that forced deeper reliance on short-term external financing and domestic banks. Negative net bond flows in 2023 were part of a broader pattern: private creditors extracted more from Pakistan than they invested, adding pressure on an already strained fiscal system.

Sri Lanka: Restructuring Offers Temporary Relief, But Debt Stock Still Rising

Sri Lanka’s post-default landscape remains fragile. Its external debt stock rose 3.2% to US$37.5 billion in 2023, even as the country remained in restructuring negotiations. The biggest structural shift: PNG debt surged 11.6%, reflecting increased private-sector exposure in an economy still unable to access global markets.

The debt servicing picture remains grim:

• LT principal repayments: US$2.8 billion
• Interest payments: US$1.7 billion
• Debt stock owed to private creditors growing despite default

Sri Lanka’s bond stock fell US$3 billion due to restructuring, but this accounting relief has not translated into sustained fiscal room. Meanwhile, bilateral flows remain negligible, and China’s retrenchment has sharply narrowed refinancing options.

Bangladesh: Escalating Debt Service Amid Slowing Exports

Bangladesh — traditionally a stable regional performer — is now seeing accelerating debt burdens:

• External debt stock rose to US$104.7 billion in 2023 (up 4.1%).
• PNG debt increased 11.4%, largely tied to energy and infrastructure imports.
• LT interest payments grew 15.5%, reflecting the rising cost of commercial borrowing.

Bond markets offered little support: Bangladesh’s LT principal repayments exceeded new disbursements, resulting in net negative bond flows. Most new financing came from multilaterals: IDA disbursements jumped 17%, cushioning the loss of private capital but deepening long-term reliance on concessional lenders.

The country’s real vulnerability is social: with rising food prices and flood shocks, a growing share of households already struggle to meet basic caloric requirements — mirroring the report’s finding that 56% of populations in the world’s most heavily indebted economies cannot afford a minimum daily diet.

India: Large Economy, But Rising Exposure

India remains relatively resilient but not immune. Its total external debt reached US$716.5 billion in 2023, supported by steady disbursements from multilaterals and commercial banks. Private-sector borrowing continues to dominate the composition, leaving India sensitive to global rate cycles.

The region-wide reliance on India’s swap lines — fully drawn in Bhutan and Sri Lanka — highlights New Delhi’s growing role as the region’s stabilizer, though these facilities remain limited in scale compared to refinancing needs.

A Region Borrowing More at a Higher Cost — and Falling Behind Socially

Measures that appear to signal stabilization — the reopening of bond markets, the US$90 billion in global restructurings, and US$80 billion in net positive bond flows worldwide — obscure the reality in South Asia. The region remained largely shut out of markets or could only borrow at punishing costs of around 10%, double pre-2020 levels.

Interest rates on newly contracted public debt hit:

• 24-year highs from official creditors
• 17-year highs from private creditors

Meanwhile, bilateral creditors withdrew US$8.8 billion more than they lent in 2024, underscoring a sharp retreat by China, Gulf lenders, and OECD donors.

Multilaterals filled the gap:

• The World Bank extended US$18.3 billion more in net financing to IDA countries
• It also delivered a record US$7.5 billion in grants

But these funds increasingly serve to refinance old debt rather than finance new projects — a distortion the report says is symptomatic of a “broken global debt system.”

Domestic Debt Becomes the New Threat

Domestic borrowing is rising even faster than external borrowing in much of South Asia. The risks are clear:

• Banks are buying government securities instead of lending to businesses.
• Shorter maturities magnify rollover pressure.
• Domestic yields remain elevated, locking in higher fiscal costs.

This creates a cycle where public sector crowding-out stifles private investment — weakening long-term growth and worsening debt dynamics.

The Real Crisis: Debt Overhang as a Development Shock

The report’s most sobering conclusion is that debt distress in South Asia is now translating into direct human hardship. For many South Asian countries, rising debt service is crowding out development, not merely squeezing budgets:

• Fewer resources for food subsidies, primary healthcare, and school meals
• Delayed climate adaptation investments despite escalating floods and heatwaves
• Widening inequality between capital-rich and capital-poor households

Indermit Gill’s warning rings particularly sharp for South Asia: “Policymakers should make the most of the breathing room that exists today to put their fiscal houses in order — instead of rushing back into external debt markets.” The data suggests that the window for course correction is narrow — and closing quickly.

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