Developing countries in the Asia and Pacific region are at the forefront of climate change, and addressing urgent climate challenges requires substantial financial commitment. At the same time, the region is struggling under mounting debt burdens. The external sovereign debt of developing Asia and Pacific nations —excluding China— has more than doubled since 2008. Servicing this debt is becoming increasingly costly: over the past three years, debt servicing costs have averaged more than 40% higher than pre-2020 levels, as a share of government revenue.
In a new working paper for the Asian Development Bank Institute, Ulrich Volz, Shamshad Akhtar, and Alex Dryden analyze these worsening debt dynamics in the region and the additional strain posed by climate change. The study highlights how unsustainable debt burdens threaten sovereign fiscal stability and undermine the ability of the developing Asia and Pacific region to meet its climate goals. Finally, it makes the case for concerted efforts to proactively tackle sovereign debt problems, which in some cases will require significant debt relief, to break the vicious cycle of debt, climate change, and underdevelopment.
Key Findings:
- External sovereign debt in developing Asia-Pacific (excluding China) has surged sharply: Debt stock rose from US$295 billion in 2008 to US$724 billion in 2023, a 145% increase. Central Asia and the Pacific Islands respectively experienced fivefold and sevenfold increases. Debt owed to private bondholders rose significantly from US$46 billion in 2008 to US$350 billion in 2023.
- Sovereign credit ratings have deteriorated alongside rising debt-to-GDP ratios, signaling mounting fiscal risks: The rise in external indebtedness has placed downward pressure on sovereign credit ratings across the Asia and Pacific region. Gross debt-to-GDP ratios reached their highest levels since the aftermath of the Asian financial crisis in the late 1990s. Several developing Asia and Pacific economies now have very high debt-to-GDP ratios, including the Maldives (123%), Bhutan (116%), the Lao PDR (116%), and Sri Lanka (116%).
- Debt servicing costs have increased substantially, constraining fiscal space:
From 2020 to 2023, average debt service consumed 10.33% of government revenue, up from 7.35% (2008–2019). Ten countries – including Bangladesh, India, Indonesia, Lao PDR, Malaysia, Maldives, and Sri Lanka – have debt service-to-revenue ratios of 10% or higher as of 2023. - Debt service crowds out investment in health, climate resilience, and SDG progress: Approximately 83% of the region’s population live in countries where governments spend more on debt servicing than on healthcare. This constrains investments in climate adaptation and in the Sustainable Development Goals (SDGs).
- There is a strong correlation between climate vulnerability and debt distress: According to IMF risk classifications and climate data from the Notre Dame Global Adaptation Initiative (ND-GAIN), nine out of ten Asia-Pacific countries currently assessed by the IMF as being at high risk of, or already in external debt distress also have climate vulnerability scores above 0.45 – placing them among the most climate-exposed countries in the world.
- The IMF’s current debt sustainability framework insufficiently accounts for climate and development needs: The current debt sustainability analysis (DSA) fails to account for climate exposure and critical development spending. An “enhanced” DSA – which integrates climate-related risks and essential SDG spending, shows that, beyond Bhutan, the Lao PDR, and the Maldives, six additional countries, including Nepal, Timor-Leste, and Myanmar, are projected to breach debt thresholds by 2027 once climate investment needs are included.
- Without systemic reforms, the region risks a widening default on development and climate: The paper calls for climate-informed debt sustainability analyses, significant debt relief for overindebted countries involving all creditor classes, the use of restored fiscal space for SDG- and climate-aligned investments, and significantly expanded access to concessional and climate-linked finance. These proposals echo those of the Debt Relief for a Green and Inclusive Recovery (DRGR) Project and are considered essential to break the vicious cycle and put the region back on a path to sustainable growth.