TWN Info Service on Finance and Development (Oct26/03)
16 October 2026
Third World Network

UN: Multi-decade high borrowing costs threaten millions with poverty
Published in SUNS #10534 dated 15 October 2026

Penang, 14 Oct (Kanaga Raja) -- A "triple shock" encompassing higher energy prices, an unprecedented El Nino phenomenon and higher borrowing costs could push millions more people into poverty, the UN Development Programme (UNDP) has warned.

In its latest analysis of the global economic impact of the Middle East conflict, UNDP said seven months into the crisis, three global pressures are proving especially challenging in many countries: energy prices are surging again after the breakdown of the United States-Iran ceasefire in July; El Nino is on course to be the strongest on record with impacts that will not peak until early 2027; and global benchmark interest rates have reached multi-decade highs.

In its report, titled "No Time to Recover: Compounding Crises, Depleted Fiscal Buffers and What It Means for Developing Economies", UNDP pointed out that the median developing economy government now spends about 9.5 percent of revenue on interest payments alone, which is more than three times higher than in the median high- income country, and not seen this high since the year 2001.

It said rising borrowing costs are particularly concerning given current conditions in the bond markets, with US 10-year Treasury yields reaching 5.3 percent, their highest level since 2002.

Higher US Treasury yields ripple through global financial markets, adding pressure on countries already carrying heavy debt burdens, it emphasized.

Ten-year bonds of median weak-credit countries are today already around 9 percent. This burden draws scarce resources away from public health, education, and social safety nets, UNDP further said.

UNDP said energy prices and El Nino are adding to the pressure, with oil prices having surged above US$100 a barrel for the second time since the conflict in the Middle East began, driving up the costs of fuel and food.

Meanwhile, the current El Nino is shaping up to be the most powerful on record, threatening harvests and food systems across Africa, Asia, and Latin America.

"Surging oil and food prices leave millions of families with no safety margin. We are witnessing a perfect storm that could throw tens if not hundreds of millions of people back into poverty," said the UNDP Administrator Alexander De Croo.

"Governments of developing countries are left with impossible choices: cut support to their poorest citizens or risk their entire development agenda," De Croo added.

According to the report, in its first assessment of the military escalation in the Middle East in April, the shock was a single one: the "most severe oil supply shock in history", transmitted to developing economies through energy, fertiliser and food prices and through weaker global growth.

UNDP said that its June update found that governments had largely avoided development reversals by cushioning the pass-through of international prices, at great fiscal cost, and that the Memorandum of Understanding between Iran and the United States of 18 June offered breathing room.

However, that breathing room did not last. The ceasefire broke down in July and oil prices have surged again.

At the same time, two additional challenges are emerging which challenge the capacity of developing countries to manage the energy shock, said the report.

One is a very strong El Nino developing in the Pacific and with an expected peak towards the end of the year, with impacts on harvests, food prices and public health that will persist through 2027.

Another is the upwards pressure on already high borrowing costs as global benchmark interest rates have risen sharply since the conflict started and some now at a multi-decade high.

"TRIPLE SHOCK"

Warning of a "triple shock" that will not ease before 2027, the report said that global oil prices spiked at the onset of the US-Iran conflict in late February and have remained highly sensitive to developments since: the late-April ceasefire, the negotiations that followed, their eventual breakdown, and the broader push and pull between potential resolution and further escalation.

"Brent crude averaged $102 per barrel in the month of September, up 22 percent since July, when the ceasefire broke down. The last time oil prices were this high was during the 2022 energy and food price shock."

The second shock is climatic. El Nino is now very strong and still intensifying. Sea-surface temperatures in the central equatorial Pacific (the Nino-3.4 region) rose from 2.2-2.6 degrees C above normal in late July and mid- August to 3.0 degrees C above normal by mid-September, and the preliminary daily reading for 30 September stood at 3.2 degrees C, the report noted.

The US National Oceanic and Atmospheric Administration (NOAA) puts the chance of a very strong event during the Northern Hemisphere autumn and winter above 90 percent, and gives a 75 percent chance that the event exceeds the strength of every El Nino since 1950, as measured by its relative oceanic index.

According to the report, the event is expected to peak towards the end of the year and to persist to at least February 2027, with a likelihood that the World Meteorological Organization (WMO) puts at close to 100 percent.

WMO expects above-normal temperatures over nearly all land areas through November, with heavy rain and flooding in some regions and drought in others, and names agriculture, public health, energy and water supplies as the sectors most exposed.

The World Food Programme projects that the 2026-27 El Nino could push at least 49 million more people into acute food insecurity across 45 already food-insecure countries by the end of 2027, raising the acutely food- insecure population in those countries from about 225 million to 274 million, an increase of 22 percent.

The report said that the largest additions are expected in East and Southern Africa (more than 18 million) and Latin America and the Caribbean (more than 16 million), with Central America facing the largest proportional increase, followed by Asia and the Pacific (8.2 million) and West and Central Africa (nearly 6 million).

The report said that the third shock is financial, with global benchmark rates at multi-decade highs. The yield on the 10- and 30-year US Treasury bonds (a global risk-free benchmark) have now reached a multi-decade high - a pattern observable across many Advanced Economies (AEs) - on account of persistent inflation and expectations of higher policy rates, large deficits and rising debt, and greater competition for long-term capital.

On 28 September, the 10-year Treasury yield reached 5.26 percent and the 30-year yield at 5.59 percent, last observed this high in the years 2002 and 2004, respectively, it added.

"Rising AE bond yields increase the pressure on already high borrowing costs for the emerging [market] and developing economies (EMDEs) even though their risk spreads have so far remained comparatively resilient."

The burden is nonetheless likely to be greatest for lower-rated and highly indebted countries, where refinancing needs, limited reserves and already-constrained market access leave little capacity to absorb a prolonged period of elevated global interest rates, the report argued.

Analysis from the World Bank shows that despite sharply higher AE yields, EMDE borrowing costs have so far risen by less because sovereign spreads have narrowed, reflecting continued investor risk appetite and no broad reassessment of EMDE creditworthiness. However, yields remain high - around 9 percent (10Y) for the median weak-credit country.

The World Bank also warns that the situation can quickly deteriorate, especially in economies with poor (below investment-grade) ratings or substantial short-term debt, as these are particularly exposed to refinancing risks and changes in global market sentiment.

This increased risk of higher borrowing costs also comes at a time where the debt service burden (relative to revenue) of developing economies has not been higher in decades, said the report.

The median developing economy government now spends about 9.5 percent of revenue on interest payments alone, which is more than three times higher than in the median high-income country, and not seen this high since the year 2001, it noted.

It said with already historic high debt servicing levels, renewed pressure on interest rates, and risk of further slowdowns in economic growth from the spillovers of the Middle East crisis and other external shocks, the debt-development trade-offs facing many developing economies are set to intensify: a growing debt service burden and emergency relief measures are siphoning funds away from long-term sustainable development investments.

According to the report, price cushioning remains the dominant response. The IMF's global policy tracker records 879 policy measures across 167 countries, with fiscal interventions (subsidies, transfers and fuel-tax reductions) dominating.

The latest International Energy Agency (IEA) tracker identifies consumer-support measures in 95 countries, compared with energy-conservation measures in 59 and structural policies in 33.

Fuel-tax reductions are the most widespread consumer measure, followed by subsidies, other financial support and price caps, said the report.

More importantly, it said policies are broadening, with little evidence of targeting. Policy announcements peaked immediately after the shock and then slowed, but consumer support has continued to expand.

Between April and September, the number of countries using tax measures rose from 35 to 57, subsidies from 13 to 38, and price caps from 13 to 23.

Structural responses are also emerging: nearly 20 countries had announced such measures by May, rising to 33 tracker entries by September, particularly in electrification, efficiency and renewable energy.

But early measures were overwhelmingly broad-based: in April, 12 of 13 price-cap measures and 33 of 35 tax measures were un-targeted.

The evidence therefore points to an accumulation of structural measures alongside, not yet instead of, costly price cushioning, the report concluded.

"Protecting households and businesses from severe price spikes while safeguarding fiscal sustainability, and preventing social unrest, is a difficult balancing act, and the balance is shifting."

The report said based on data for 130 countries, average retail prices for gasoline and diesel have risen by 26 and 38 percent, respectively, since the conflict broke out in late February, and only about one country in ten has kept pump prices unchanged.

"The distribution is wide: for diesel, nearly half of the countries have seen increases above 40 percent, and eleven have seen prices rise by more than 70 percent."

The report said that the pass-through is also increasing over time. Comparing the same countries between June and September, the combined gasoline-diesel price increased further in close to two-thirds of 128 countries with available data, consistent with greater pass-through of international prices.

The report said across the full sample, the cumulative retail price increase since the conflict began widened by an average of 8.1 percentage points; among the 83 countries that recorded further increases, it widened by almost 16 percentage points.

With current energy prices, UNDP estimates that global explicit fossil fuel subsidies could surpass $1 trillion this year alone.

The report said that across developing economies, the debt-development trade-off is deepening as scarce fiscal and financial resources are funnelled toward emergency relief measures and a rising debt-service burden instead of the long-term investments needed for sustainable development.

Notably, it said the social costs are also rising. Rising energy prices have already contributed to protests and social unrest in at least ten countries in September, from Syria, Guatemala and the Philippines to France and Portugal, as governments find it increasingly difficult to maintain costly price-cushioning measures amid widespread fiscal stress.

Governments are being pushed from both sides: the cost of holding prices down rises, while the political cost of letting them rise is already visible on the streets, the report underlined.

COST IMPLICATIONS

In order to determine how much price containment has actually been worth, and what would it cost to replace it, the report constructed a counterfactual taking the IMF's April 2026 growth baseline for 159 countries, covering about 97 percent of the world's population, and letting the 2026 energy and food price shock pass fully through to household budgets, with no subsidies, price caps or transfers.

It said in the central case, retail energy prices rise by 30 percent and food prices by 10 percent; a low case (+20 and +5 percent) and a high case (+45 and +15 percent, at or above full pass-through of the rise in crude) bound the result.

It said that the real income of each household falls by its budget share of food times the food price change plus its budget share of energy times the energy price change, with shares that are higher for poorer households and poorer countries.

It said that in the central case, 132 million more people fall below the $6.85-a-day poverty line in 2026 than in the IMF baseline, with a range of 80 to 200 million across the low and high cases; 121 million more fall below the $3.65 line and 66 million more into extreme poverty below $2.15. Virtually all of them are in developing countries.

By region, it said East Asia and the Pacific (47 million) and South Asia (44 million) account for more than two- thirds of the total at $6.85.

Sub-Saharan Africa adds 16 million, the Middle East and North Africa 11 million, Latin America and the Caribbean 10 million and Europe and Central Asia 4.5 million; the advanced economies add under 1 million.

Of the 66 million pushed into extreme poverty (below $2.15), 36 million are in Sub-Saharan Africa (55 percent of the total) and 20 million in South Asia (31 percent of the total); East Asia and the Pacific contributes 4 million (7 percent of the total).

Sub-Saharan Africa's extreme-poverty headcount rises by 2.8 points, more than twice the increase in any other region.

At $3.65, South Asia (57 million) and Sub-Saharan Africa (32 million) lead, followed by East Asia and the Pacific (20 million), said the report.

By income group, lower-middle-income countries carry the largest share at every line: 65 of the 132 million at $6.85 (49 percent), 84 of the 121 million at $3.65 (69 percent) and 42 of the 66 million at $2.15 (63 percent).

Low-income countries account for 29 percent of the increase in extreme poverty (19 million) but only 6 percent at $6.85, where almost nine in ten of their people are already below the line, said the report.

Upper-middle-income countries matter mainly at the $6.85 line, where they add 58 million (44 percent), and barely at all in extreme poverty (5 million).

Either way, the report said holding every household's real income constant in the face of the shock, which is the cash equivalent of blanket price containment, would cost about 1.1 percent of developing-country GDP in 2026 (0.6 to 1.6 percent across the low and high cases), or about $1.1 trillion in 2017 purchasing-power-parity (PPP) dollars.

Compensating only households below the $6.85 line for their real-income loss would cost about 0.3 percent of GDP (0.15 to 0.4 percent across the low and high cases), or about $255 billion PPP: the same protection for the poor at roughly a quarter of the cost.

However, the report said that most low-income and many middle-income countries cannot pay either bill from a budget where interest payments already consume 9.5 percent of revenue for the median country and more than 20 percent for about 17 percent of countries.

UNDP said that the fork is therefore not a choice between a cheap option and an expensive one; it is a choice between a bill that can be targeted and a bill that cannot, in countries that will struggle to fund the smaller of the two without external support.

POLICY IMPLICATIONS

Against this backdrop, the report highlighted four policy implications, First, price cushioning has bought time, but time is running out. Containment has been shielding households from a poverty reversal of up to about 130 million people, but the shield is thinning: its cost rises with every month of $100 oil, the shock is increasingly being passed onto consumers, and protests and unrest are following where support is withdrawn.

The question for governments is not whether to respond but how to shift from a large un-targeted bill to a more targeted and sustainable one, it said.

Second, targeted and temporary support remains the preferred instrument.

Compensating households below the $6.85 line for their real-income loss delivers the same protection for the poor as blanket containment at roughly a quarter of the cost - 0.3 percent of developing-country GDP against 1.1 percent.

Countries with social registries and payment systems should shift support toward cash transfers or lifeline tariffs; countries without them may need temporary consumption blocks for electricity or cooking gas, but should avoid open-ended gasoline and diesel subsidies that disproportionately benefit richer households and firms, the report suggested.

Third, it said the El Nino event is changing the sequencing. A record-strength event peaking into early 2027 means that the food price and harvest shock will arrive while the energy shock is still being absorbed, in many of the same countries.

Anticipatory action, protecting input access during planting windows, and keeping food assistance and adaptive social protection ready to scale are the counterparts on the climate side, and of targeted transfers on the energy side, it added.

Fourth, many low-income and some middle-income countries will struggle even to fund a targeted response as budgets are already under severe pressure and fiscal stress is high, the report stressed.

The prospect of higher global benchmark rates further pushing up their borrowing costs will only worsen an already bad situation, it cautioned.

It said that transitioning to well-targeted social protection takes time and is difficult in the middle of a crisis.

As a result, it said access to affordable budget and balance-of-payments support from international financial institutions is therefore the central priority for fiscally constrained countries: it is what allows them to weather the shock while building the systems that would let them target the next one. +