Low-income countries (LICs) are finding it increasingly difficult to manage a growing burden of external debt. One important, but sometimes overlooked, reason: The flow of earnings from exports is becoming more volatile, and therefore less predictable, making it harder for LICs to service their external obligations. The 2025 International Debt Report shows that increasingly sharp swings in export income are associated with growing debt distress in LICs, highlighting the importance of smoothing export earnings.
Over the past decade, LICs’ external debt has grown far faster than export earnings. From 2014 to 2024, total external debt nearly doubled— to $242 billion from $139 billion—while export earnings rose only about 70 percent, to $130 billion from $76 billion. Debt service now absorbs more than 9 percent of export earnings, compared with roughly 7 percent a decade ago. This suggests that LICs increasingly face a significantly higher debt repayment burden relative to their export-earnings, and that they are highly vulnerable to tighter financial conditions after benefiting from easy ones in the last decade.
Why do exports matter for debt sustainability? A country’s capacity to repay external debt depends on its ability to earn foreign exchange through exports. Most external debt must be repaid in foreign currency - typically US dollars or euros—so when export revenues fall, governments and firms have fewer resources to make payments. That forces painful choices: cutting essential imports, drawing down reserves, or borrowing more just to service existing debt.
The share of LICs classified as facing high debt risk or in debt distress has more than doubled, from 24 percent in 2013 to 54 percent in 2024. Export volatility in LICs – measured by year-to-year changes in export earnings – has risen considerably since 2019, largely driven by commodity-price fluctuations and various types of trade disruptions. Many LICs remain heavily reliant on a narrow range of exports—oil, metals, or agricultural goods. Prices of such commodities are set in global markets and can fluctuate considerably. This dependence exposes LICs to sudden drops in revenue that can quickly strain their capacity to repay debt.
Notably, countries at high risk of debt distress in 2024 were among the ones experiencing the greatest trade volatility. Correlation doesn’t necessarily imply causality. Nevertheless, the link highlights the importance of more systematically incorporating trade volatility into the World Bank’s Debt Sustainability Analysis (DSA).
Unfortunately, trade volatility is expected to remain high and may even increase in the medium to long term. Recent sources of instability include:
- Rising protectionism and frequent shifts in trade policies threaten demand for LICs’ exports and ability to earn foreign exchange.
- Climate change is intensifying the frequency and severity of supply shocks, especially for commodity exporters vulnerable to droughts, floods, or cyclones.
To build resilience, LICs need policies that address sources of vulnerability in their export sectors. Stronger resilience can mean more stable external revenue and a broader export base, reducing the magnitude, and therefore the impact, of temporary shocks on debt sustainability.
Key areas for policy action include:
- Diversifying exports: Expanding into new products, markets, and services—including digital and green sectors – to reduce dependence on a narrow set of products and partners. The World Bank’s Trade Competitiveness Diagnostic can be used to analyze trade performance, identify constraints to competitiveness, and derive recommendations for reform.
- Upgrading logistics to improve supply chain reliability and reduce costs, making exports more resilient. The World Bank’s Logistics Performance Indicators are a useful tool for assessing the quality of logistics.
- Deepening trade agreements: Stronger institutional frameworks can secure more predictable access to markets. The World Bank’s Deep Trade Agreements Toolkit can help.
- Enhancing exchange-rate responsiveness: Supporting firms that can expand exports when faced with exchange rate depreciation, helping offset external shocks. As this blog post explains, exporters will need continued access to trade finance if they are to benefit from currency depreciation.
Debt sustainability is more than a question of borrowing prudently – it is also about stabilizing the income that services that debt. Integrating trade volatility into debt sustainability analyses, while pursuing reforms that strengthen export resilience, will help low-income countries safeguard growth and reduce the risk that today’s debts morph into tomorrow’s crises.
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