Across much of the developing world, governments are confronting a fiscal squeeze of unprecedented proportions. Rising debt-service obligations are colliding with growing demands for healthcare, education, climate adaptation, urban infrastructure, energy transition and social protection. The traditional response has been to rely on aid, concessional finance and periodic debt relief. Yet the environment that sustained these approaches is changing rapidly.
Africa illustrates the challenge starkly. According to the Mo Ibrahim Foundation's 2025 Forum Report, African governments spent more than $100 billion servicing debt in 2024, accounting for 13.6% of public expenditure, compared with 7.3% spent on health. In at least 28 countries, debt-service payments exceeded health spending. Similar pressures are visible across Asia and Latin America, where governments are struggling to finance development priorities while carrying increasingly burdensome debt obligations.
The question is no longer whether developing countries need more resources. The more important question is whether the financing architecture they have relied on for the past four decades remains fit for purpose.
The Limits of the Old Model
For much of the post-Cold War era, development finance rested on three pillars: aid, concessional lending and periodic debt relief. Together, they enabled developing countries to supplement domestic resources and periodically ease debt burdens.
Today, all three pillars are under strain.
Advanced economies are themselves under fiscal pressure from ageing populations, elevated public debt, post-pandemic spending commitments and rising defence expenditure. OECD estimates indicate that Official Development Assistance (ODA) contracted sharply in 2025 following an earlier decline in 2024, with bilateral grants and support to sub-Saharan Africa falling particularly steeply. USAID's retrenchment is perhaps the most visible manifestation of a broader trend: governments are increasingly prioritising domestic demands over external commitments.
In response, debt-linked financing instruments have attracted growing attention.
Debt-for-health swaps illustrate the challenge. Despite their appeal, they have remained marginal because they depend on creditors surrendering value. As sovereign debt shifts from bilateral lenders to commercial investors whose obligation is to maximise returns, and as aid budgets contract, the scope for scaling such instruments narrows. Their limitations are therefore structural rather than operational.
The Real Challenge Is Capital Formation
The central challenge confronting many developing countries is increasingly one of capital formation rather than resource mobilisation. What is often described as a shortage of resources is, in many cases, a problem of balance-sheet design.
Governments possess assets and future revenue streams that remain largely disconnected from global pools of long-term capital. Resource mobilisation seeks additional money; capital formation seeks to make existing assets more productive through financial innovation.
Infrastructure finance offers an important lesson. Roads, airports, transmission networks and renewable energy projects evolved from budgetary expenditures into investable asset classes. The assets did not change; the financial architecture around them did.
From Debt Relief to Debt Transformation
Perhaps the issue lies less in the availability of resources than in how development finance is structured.
The conventional debate begins with the premise that health, education and other social sectors are primarily fiscal expenditures requiring ever-increasing budgetary allocations. That assumption deserves to be revisited.
Not every component of healthcare can or should be commercialised. Primary care, preventive services and public health interventions will continue to require public funding. Yet significant parts of the health ecosystem resemble infrastructure assets. Hospital networks, diagnostic facilities, pharmaceutical manufacturing, and digital health platforms require large upfront investment, have long asset lives and generate predictable revenue streams.
One possibility is a Health Infrastructure Investment Platform at the national or regional level. Rather than cancelling debt, creditors could exchange debt claims for equity participation in a professionally managed portfolio of health-sector assets. Individually, many such assets are too small or fragmented to attract institutional investors. Aggregated into a diversified platform, however, they begin to resemble the investment vehicles that have mobilised long-term capital for transport, energy and telecommunications.
This kind of model represents a shift from debt relief to debt transformation. The objective is no longer to reduce liabilities through creditor concessions but to convert liabilities into productive assets capable of attracting long-term capital. Multilateral development banks and development finance institutions could support such platforms through guarantees, credit enhancement and other risk-sharing mechanisms, helping to crowd in institutional investors at scale.
Such an approach would fundamentally alter the incentive structure. Rather than requiring creditors to absorb losses, it would offer opportunities to participate in value creation. Rather than relying on shrinking aid budgets, it would seek to mobilise long-term capital from investors searching for stable returns. Most importantly, it would shift health financing from recurrent expenditure to productive investment.
The idea remains conceptual and requires substantial analytical work. Questions of governance, valuation, risk allocation, regulation and public accountability would need careful examination. Yet the broader principle deserves attention.
Debt relief redistributes value. Debt transformation seeks to create value.
A New Development Finance Conversation
For decades, development finance has been dominated by debates about how much additional money rich countries should transfer to poor countries. That debate is becoming increasingly detached from fiscal realities. Aid budgets are under pressure. Debt forgiveness faces growing resistance. Commercial creditors are playing a larger role in sovereign finance.
The defining development finance challenge of the coming decade may therefore not be how to secure larger aid flows or negotiate deeper debt relief. It may be how to convert public liabilities into productive assets that can attract long-term capital.
Africa's debt-for-health debate offers an important lesson. The future is unlikely to belong to financing models dependent on ever-expanding transfers from advanced economies, but to those that align the interests of governments, investors and citizens.
Debt relief will continue to have a role, particularly in countries facing acute distress. But it is unlikely to provide a scalable answer to the financing challenges confronting the developing world. The more promising path may lie in transforming liabilities into assets and fiscal constraints into investment opportunities.
That is a conversation developing countries need to begin now.
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