Issue local currency loans to reduce debt burden, report says

Countries such as Kenya could ease their debt burden if multilateral lenders extended more loans in local currencies, reducing their exposure to exchange rate fluctuations, a United Nations-backed report has reealed.

However, the report by the UN Trade and Development (Unctad) says developing countries must also take responsibility by strengthening public institutions and improving the accuracy and quality of their debt records to achieve more sustainable borrowing.

The October 2026 report outlines short- and long-term measures that both lenders and borrowing governments could adopt to address mounting debt pressures  and improve debt sustainability across developing economies.

It highlights the need for reforms in lending practices, alongside stronger institutional capacity and better debt management systems in borrowing countries.

It is argued in the report that due to exorbitant interest rates charged by multilateral lenders on developing countries, these nations are now forced to balance between repaying the debts and funding their development agendas.

The report titled ‘A World of Debt 2026: Rising debt costs and stalling development’  states that rapidly rising interest payments are absorbing a greater share of government revenues, thereby constraining the fiscal space available for other public expenditures.

“Between 2010 and 2023, per capita interest payments in developing countries grew significantly faster than equivalent health and education expenditures in most developing countries,” reads the report.

The report says interest costs continued to rise strongly in both 2024 and 2025, so the gap is likely to have widened further.

“The rising interest burden has forced developing countries to spend more on debt servicing than on critical developmental priorities,”  it adds.

It emphasises that interest bills matter because of what they leave to pay for everything else.

“The share of public resources absorbed by interest shapes how much governments can invest in the health, education and skills of their people, and in expanding the productive capacity of the economy – with developmental impacts that extend far into the future,” the report reads.

In Kenya’s 2026/27 budget, the government will be spending more than Sh2.3 trillion in debt repayments (both redemption and interest) but less than Sh1 trillion on development.

Considering this year’s budget is Sh4.8 trillion, it means half of the expenditure would be used to repay debts.

Unctad warns that the interest premium that developing countries pay to finance their  public debt directly impacts their capacity to advance their development agendas and meet the needs of their people.

The report documents that these structurally higher interest costs have been rapidly elevated in recent years by policy responses to a series of global conflicts and crises.

This has left the affected countries with even less fiscal space to finance investment in health and education systems, economic, social and digital infrastructure, climate adaptation and other priority areas.

Unctad says addressing the causes of the structurally higher interest rates that developing countries pay requires examining both their external and domestic drivers.

“Ensuring that multilateral and regional development banks can provide more concessional finance, grants, guarantees, and local currency loans is essential for lowering borrowing costs and expanding the overall scale of financing available to developing countries,” the report says.

Further, it says, reversing the decline in official development assistance will also assist in this regard.

The report echoes President William Ruto’s push for a new global financial architecture on grounds that the current structure disempowers African nations.

It points out that collaborative efforts to scale up technical assistance to enhance debt management and investor communication capacities and strengthen the voice of borrower countries can reduce vulnerabilities, lower sovereign credit risk and raise investor confidence.

“United Nations Member State-led initiatives to establish a Borrowers’ Platform and to entrench principles of responsible sovereign borrowing and lending are advancing and should assist developing countries to reduce their borrowing costs, build necessary capacities to deal with a more complex debt landscape, and learn from each other’s experiences,” the report says.

However, the local economies themselves have a role to play in ensuring they are not disadvantaged.

Unctad says at national level, developing countries need to reduce their credit risk by strengthening their macroeconomic management, improving the quality of their public institutions, enhancing both the transparency and quality of their financial and debt data.

“They also need to focus on improving the structure and investor composition of their debt portfolios so that their exposure to inevitable external shocks is reduced,” the report says.

This is in addition to scaling-up their use of innovative financial instruments to expand their access to finance and reduce the costs of servicing their debt.