IMF and World Bank debt analyses grossly underestimate sustainability problems, finds new report
Photo: iStock Debt service payments from emerging markets and developing economies (EMDE), excluding China, are projected to reach a new peak in 2024. The situation is expected to deteriorate over the next five years, with approximately 47 of these economies predicted to default on their loans if they prioritise investments in internationally agreed climate and development objectives, according to a new report.
The report from the Debt Relief for a Green and Inclusive Recovery (DRGR) Project, a collaborative effort between multiple institutions aimed at tackling sovereign debt crises, conducted an enhanced debt sustainability analysis (DSA) on 66 economically vulnerable countries.
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These nations were selected based on their eligibility for International Monetary Fund (IMF) and World Bank debt sustainability framework for low-income countries.
The IMF and the World Bank produce regular DSA, which are structured examinations of developing country debt based on the debt sustainability framework. This is used to guide the borrowing decisions of low-income countries in a way that balances their financing needs with their ability to repay.
The new report found that IMF and World Bank DSAs grossly underestimate debt sustainability problems in EMDEs by ignoring critical development and climate investment needs.
“Investment needs in climate resilience, health, education and other critical elements of the 2030 Agenda and Paris Agreement must be included in DSAs to provide a true picture of a country’s debt sustainability and prospects for fiscal stability,” read the report.
The report also examined the extent to which EDMEs can meet the recommendations put forth by the Independent Expert Group to the Group of 20 (G20), which called for the mobilisation of $3 trillion annually, of which $1 trillion would need to come from external sources and $2 trillion generated domestically, by 2030.
The enhanced DSA produced in the new report estimates that 42 of the 66 countries studied would surpass debt solvency thresholds owed to external sources by 2028 if they mobilised financing for climate and development.
Among them, 18 are low income countries, 19 are low- and middle-income countries and three are upper-middle-income countries.
Five more countries could surpass these thresholds if they are faced with unexpected climate shocks or prolonged high base interest rates. Altogether, 47 countries will need debt relief.
Read more: Debt of emerging markets & developing economies rose by 178% from 2008-2022: Report
The report stated:
While the collective GDP of these 47 countries is equivalent to less than 2 percent of the world economy ($1.6 trillion as of 2022), they are home to 1.11 billion people.
In 2024, their analysis showed that 47 countries are projected to require $95 billion to fund progress on sustainable development goals and climate initiatives. They will also pay $43.3 billion in external debt service payments the same year, the analysis highlighted.
Without debt relief, the authors stress, debt burdens can affect expenditures on socio-economic priorities. For example, of the 47 countries, 21 allocate more public funds to servicing external and domestic debt interest alone than to public health spending.
Additionally, 19 other EDMEs might not be able to channel finance into climate and developmental goals without credit enhancement or liquidity support, though they are not likely to face imminent insolvency issues (unable to pay debts).
The report also noted that the external public debt levels in EDME, excluding China, have more than doubled in 2022 since the 2008 global financial crisis—from $1.27 trillion in 2008 to $3.1 trillion in 2022.
Further, the current debt service has reached levels not seen since the 1990s when much of the Global South was on the brink of default.
This is accompanied by the growing influence of private creditors. In 2008, the Paris Club, World Bank and other multilateral development banks held 46 percent of the public external debt stock of developing countries.
By 2022, their combined share decreased to 34 percent. Private bondholders’ shares in the public external debt stock of EDMEs, excluding China, increased from 30 percent to 41 per cent.
“The international community has been here before. We must learn the lessons of history and avoid doing 'too little, too late' as in debt crises in the past. We can't let this history repeat itself, or the material and moral costs will be insurmountable,” Kevin P Gallagher, DRGR Project co-chair and director and professor of global development policy, Boston University, said in a statement.
The report called for G20 Common Framework to consider enhanced DSAs and compel all creditors to participate and deliver debt relief necessary to mobilise financing for climate and development goals.
The Common Framework was developed by the G20 in 2020 to facilitate timely, orderly, and durable debt treatment and to forge the principles of fair burden-sharing across official and private sector creditors.
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