Introduction

The escalating debt crisis in the Global South is a structural issue rooted in historical patterns of extraction, unequal financial architecture, and asymmetric power relations. In 2024, the external debt of low- and middle-income countries (LMICs) approached an all-time high of US$8.9 trillion, with interest payments alone reaching a record US$415.4 billion. Many governments now allocate more resources to servicing debt than to health, education, or climate action. While the global transition away from fossil fuels is economically underway, with prices for solar and offshore wind now 41 percent and 53 percent less expensive than fossil fuels, it remains disorganised. Fossil fuel-reliant countries could see a drop of 51 percent in government oil and gas revenues over the next two decades.

The structural link between fossil fuels and sovereign debt

Debt and fossil fuel reliance are mutually reinforcing. High debt-service obligations crowd out investment in renewable energy and social protection, while fossil fuel contracts and subsidies create fiscal rigidities that deepen indebtedness. In producing nations, governments facing fiscal stress often prioritise extraction and export projects to earn foreign currency. In importing nations, reliance on fuel taxes creates incentives to maintain consumption. This cycle locks countries into volatile energy systems and recurring debt adjustments, enforced by international and multilateral institutions. Fossil fuel companies are noted as the biggest users of Investor State Dispute Settlements (ISDS), wrenching over US$327 billion from nations taking transition steps.

Cross-country patterns

Colombia is a fossil fuel producer where the debt-to-GDP ratio rose from 32 percent in 2008 to 58 percent in 2025. Debt servicing absorbs 21 percent of the central government’s budget, while public spending on the energy transition amounted to only US$3 billion in 2025—just over one quarter of the estimated annual investment needs. Renewables reached 15 percent of the electricity matrix by January 2026.

Egypt’s external debt surged more than 320 percent between 2010 and 2024 to approximately US$156 billion. Interest payments alone absorb nearly half of total government spending, and the draft FY 2025/26 budget allocates more than 65 percent of expenditure to debt service. To secure foreign currency, the state has doubled down on gas expansion, yet arrears to foreign oil companies reached a peak of US$7 billion.

Guyana presents a paradox as one of the world’s fastest-growing oil producers that remains a domestic carbon sink. While oil revenues have improved headline debt indicators, 92 percent of projects are exposed to ISDS risks, representing up to US$21 billion. Only 3 percent of employment in the country is generated by the fossil fuel industry.

Jordan imports most of its energy and has developed a structural reliance on fuel and tobacco taxes, which generate up to US$4.8 billion annually. Renewable energy growth slowed dramatically from double-digit rates to approximately 5 percent after 2021 due to rigid take-or-pay clauses in the US$15 billion gas deal with Israel and the Attarat oil shale project.

Sri Lanka was among the first to default on foreign debt after the pandemic, with debt-to-GDP peaking at 114 percent in 2022. Cyclone Ditwah in November 2025 caused damage equivalent to 4 percent of GDP. The nation faces an annual foreign debt repayment commitment of 4 percent of GDP from 2027, leaving limited fiscal space for climate recovery.

Policy recommendations

International financial institutions (IFIs) and multilateral development banks (MDBs) must implement debt cancellation and end all fossil fuel extraction and production finance. Reallocated finance should prioritise transition-enabling public goods, such as grid modernisation and electrification. Global North governments must pay a fair share of climate finance through grants rather than loans and end all public finance support for fossil fuels.

The United Nations should establish a binding mechanism on debt resolution and create a global public debt registry to strengthen oversight. Global South governments are encouraged to commit to differentiated fossil fuel phase-out plans, replace fossil revenues through green industrial policies, and mobilise national development banks to finance the green transition. All decision-makers must centre procedural justice and safeguard the transition through enforceable frameworks that protect labour and ensure equitable access to public services.

Conclusion: from moral indictment to structural transformation

Escaping the fossil fuel–debt trap requires coordinated transformation across global finance, debt governance, and energy systems. Coordinated strategies to break the cycle include centering debt justice, including cancellation, and aligning it with grant-based finance to support the potential of 100 percent renewable energy-based economies.