In Colombo, the symbolism is unmissable. A $4 billion credit line from India kept Sri Lanka afloat in 2022 when reserves collapsed; Chinese banks followed with restructurings that still leave Colombo in negotiations today. In Port Louis, India has pledged $680 million to develop port and surveillance infrastructure, an unmistakable assertion of maritime strategy. Across the region, sovereign balance sheets now double as terrain for rivalry between India and China. Debt is not simply finance; it has become diplomacy by other means.

Asia’s debt landscape is vast and uneven. According to IMF data, outstanding credit to Asian borrowers now exceeds $160 billion, with Pakistan, Sri Lanka, Egypt, and Bangladesh among the largest users. Annual repayment obligations to the Fund alone rise from roughly $18 billion in 2025 to over $24 billion by 2029. Behind these aggregates lie stories of austerity, geopolitics, and the trade-offs between sovereignty and solvency.

A history of debt waves

Asia’s current reckoning is not unprecedented. In the 1980s, developing economies across the continent borrowed heavily to finance industrialisation just as global interest rates surged. The result was insolvency and IMF rescues, from the Philippines to Indonesia. Structural adjustment followed: devaluations, subsidy cuts, privatisations.

The 1997–98 Asian Financial Crisis marked the second wave. Currencies collapsed from Bangkok to Jakarta, capital flight triggered unemployment spikes, and IMF-led programmes imposed sweeping reforms. The crisis seared into political memory the dangers of overreliance on volatile foreign capital. Yet lessons proved partial. While some economies like South Korea built war chests of reserves, others fell back into dependency.

The 2008 global financial crisis produced a third wave—this time from excess liquidity. Investors searching for yield pushed money into frontier Asia. Sri Lanka, Mongolia, and Laos issued Eurobonds for the first time. Debt looked affordable, but only while global rates stayed low.

The pandemic in 2020–21 completed the cycle. Lockdowns slashed revenues, health budgets ballooned, remittances dipped. Governments borrowed to survive. The consequences are now maturing: 2025 is the moment of reckoning, where liquidity dries just as maturities come due.

The scale of exposure

External debt in Asia has more than doubled in the past decade, driven by Eurobond issuance, bilateral loans, and multilateral facilities. Servicing costs have risen even faster, as global interest rates climbed from near zero in the late 2010s to levels not seen since the 1990s. Pakistan’s gross external financing needs are projected at $24 billion in FY2026, roughly 7 per cent of GDP. Sri Lanka’s restructured bonds continue to trade at 60–65 cents on the dollar, reflecting investor scepticism. Bangladesh, despite its garment-export strength, required a $4.7 billion IMF programme in 2023, underscoring liquidity fragility. Laos, with external debt near 95 per cent of GDP, has pledged hydropower revenues as collateral.

These are not anomalies but illustrations of a pattern: liquidity management through rolling maturities and concessional programmes, without structural change in tax collection, export diversification, or institutional resilience.

Sri Lanka: restructuring without relief

Sri Lanka offers the most visible cautionary tale. The 2022 default, its first as a sovereign, was triggered by collapsing reserves and political unrest. India stepped in with emergency credit lines and swaps that kept essential imports flowing. China, holding nearly 20 per cent of bilateral debt, became central in restructuring talks.

The agreement reached in 2023 reduced near-term pressures but left the country with a long tail of obligations. Even post-restructuring, debt-to-GDP remains near 100 per cent. Bonds trade below par, reflecting doubts about medium-term sustainability. Fiscal tightening has been severe: fuel subsidies cut, VAT raised, public wages frozen. Citizens feel the costs in higher transport fares, reduced school budgets, and inflation in staples. For investors, Sri Lanka tests whether fragmented creditors—Chinese banks, Indian facilities, Eurobond holders—can coordinate without the Paris Club’s dominance. The lesson so far is sobering: restructuring stabilises liquidity but does not guarantee recovery.

Pakistan: surcharges and survival

Pakistan epitomises IMF centrality. A Stand-By Arrangement in 2023 was followed by a larger Extended Fund Facility in 2024. Disbursements prevented outright default, but the mechanics illustrate the costs of reliance.

Surcharges on large, prolonged borrowings mean Islamabad pays hundreds of millions annually above base rates. In December 2024, a transfer to the Fund exceeded the federal education budget—a stark demonstration of trade-offs between creditors and classrooms. Domestic debt markets, meanwhile, demand yields above 16 per cent, transferring wealth to connected elites.

Liquidity support from China and Gulf partners fills gaps, often through short-term swaps. But these are strategic instruments, not neutral finance. China’s terms are tied to CPEC infrastructure corridors; Gulf credit aligns with energy diplomacy. Pakistan’s fiscal sovereignty is thus mediated by external actors, each with leverage.

Bangladesh: liquidity under the surface

Bangladesh has not defaulted and retains robust export momentum through garments. Yet the IMF’s 2023 programme revealed vulnerabilities: a thin reserve cushion, dependence on a single export category, and mounting energy import bills.

Reforms linked to the programme include raising energy tariffs, expanding the tax base, and reinforcing central-bank autonomy. These measures are procedural, not conspiratorial. But their timing is procyclical: higher energy prices during inflationary stress, tighter fiscal policy as growth slows. For investors, the lesson is that apparent stability can mask fragility; for policymakers, it highlights the narrowness of an export-led model reliant on global demand for low-cost garments.

Laos: collateral as policy

Laos exemplifies the risks of collateralisation. Hydropower projects financed by Chinese loans have pushed debt close to 95 per cent of GDP. Export revenues from power sales are pledged directly to service obligations, limiting fiscal discretion.

This structure secures short-term finance but mortgages sovereignty. When drought or regional grid demand falters, obligations remain even as revenues dip. Creditors thus hold leverage not only over repayment but over strategic assets. Sovereignty shrinks by contract, not by conquest.

India, China, and the architecture of finance

India and China are not simply participants in this debt landscape; they are its architects. China’s Belt and Road Initiative (BRI) created corridors of infrastructure-linked finance from Pakistan’s Gwadar port to Laos’ hydropower dams. As maturities mount, Beijing has shifted from net lender to restructuring counterpart, testing its willingness to absorb losses.

India, while a smaller lender, uses targeted lines of credit to cement maritime strategy. Facilities in Sri Lanka, Mauritius, and the Maldives blend port infrastructure with surveillance capability. These are not neutral projects: they advance Delhi’s vision of a secure Indian Ocean. For smaller states, the rivalry offers options but not autonomy. Choosing Indian or Chinese finance is less about diversification than about managing asymmetry. Debt becomes diplomacy, embedded in maturities and collateral.

Japan, ASEAN, and alternative safety nets

Japan remains Asia’s most traditional creditor. Through the Japan Bank for International Cooperation (JBIC) and the Asian Development Bank (ADB), Tokyo finances infrastructure and climate projects with fewer geopolitical strings, but often slower disbursement.

ASEAN, chastened by the 1997 crisis, launched the Chiang Mai Initiative as a regional swap arrangement. Yet activation has been rare, partly because IMF involvement remains a prerequisite. The mechanism symbolises regional aspiration but underscores enduring dependence on external anchors.

Gulf states, flush with oil revenues, also matter. Deposits in Pakistan’s central bank, credit lines to Egypt, and investments in energy infrastructure provide liquidity but carry political conditions, from foreign-policy alignment to arms purchases.

The social costs of liquidity management

Debt service commands priority; social budgets adjust accordingly. In Sri Lanka, health procurement shrank during restructuring. In Pakistan, education spending was curtailed to meet repayments. In Bangladesh, energy price hikes eroded household incomes.

These trade-offs shape political legitimacy. Citizens perceive asymmetry: creditors are paid punctually, while salaries, subsidies, or services are delayed. Protests follow, sometimes peaceful, sometimes destabilising. For investors, this is central: fiscal sustainability without legitimacy rarely endures.

Ratings and perception

Global ratings from Moody’s, S&P, and Fitch dominate bond markets. Sri Lanka is rated distressed; Pakistan trades at the lower end of single-B. Yet regional agencies like Japan’s R&I and JCR, or Bloomfield and GCR in Africa, often flag risks earlier, especially around contingent liabilities and fiscal opacity.

This divergence matters. Investors in Asian markets increasingly consult both sets of ratings. When R&I placed Mauritius on negative outlook in 2024, bond spreads widened despite no Western downgrade. In Sri Lanka, credibility erosion was visible locally before Moody’s acted. Western ratings emphasise repayment history; regional ratings interrogate governance and quasi-fiscal exposure. The result is a perception gap that directly affects borrowing costs—and ultimately social spending.

Climate and the next debt frontier

Asia is on the front line of climate vulnerability. Cyclones in Bangladesh, floods in Pakistan, and drought in Laos all impose fiscal shocks. Yet debt instruments rarely incorporate resilience clauses. Catastrophe bonds and state-contingent debt remain exceptions, not norms.

As climate stress escalates, the risk is double: governments borrow more to rebuild, while creditors demand higher premia for vulnerability. The debt cycle thus intertwines with climate change, amplifying both.

Technology, labour, and new vulnerabilities

Debt is not only about finance; it interacts with technological disruption. Asia’s development model rests heavily on labour-intensive exports—garments in Bangladesh, outsourcing in India and the Philippines, manufacturing in Vietnam. Artificial intelligence and reshoring trends threaten these models.

Mass layoffs in export sectors would reduce foreign-exchange inflows, strain reserves, and heighten reliance on external finance. Few sovereign debt frameworks currently integrate this risk. Yet by the late 2020s, it may rival commodities and climate as a driver of solvency.

Scenarios for 2026–2030

Best case: Global rates ease, commodities stabilise, tax bases expand, reforms deepen. Debt ratios decline gradually, social investment resumes, investor confidence returns.

Muddle-through: Most likely. Restructurings drag, IMF programmes roll forward, austerity endures. Liquidity stabilises but resilience eludes. Growth remains below potential, political volatility persists.

Worst case: Defaults cascade across frontier Asia, collateralised loans proliferate, disputes multiply in London and New York courts. Ports, hydropower corridors, and mineral rights shift to creditor control. Sovereignty shrinks, not through force but through legal obligation.

Debt as strategy

Asia’s debt reckoning is not simply about capacity to repay. It is about the terms under which repayment occurs, and the geopolitical architecture those terms reinforce. India and China, through credit lines and restructurings, shape the region’s financial future as much as the IMF or World Bank.

For smaller states, the question is not whether they will pay—they will—but what they will surrender in the process. Relief stabilises ledgers but not legitimacy. Resilience requires transparency, diversification, and institutions capable of resisting capture. Without these, debt remains less an instrument of development than a geometry of dependence, drawn by creditors and lived by citizens.