Poorest countries are in debt; spent record $443.5 bln in debt service payments

Developing countries spent a record $443.5 billion to service their external public and publicly guaranteed debt in 2022. These costs shifted scarce resources away from health, education, environment and other critical areas, the World Bank’s latest International Debt Report showed. 

Debt-service payments, which include principal and interest, increased by 5 per cent over the previous year for all developing countries. The 75 countries eligible to borrow from the World Bank’s International Development Association, which supports the poorest countries, paid a record $88.9 billion in debt-servicing costs in 2022. This record debt level and interest rates have set many countries on a path to crisis. 

Over the past decade, interest payments by these countries have quadrupled to an all-time high of $23.6 billion in 2022. Overall, debt-servicing costs for the 24 poorest countries are expected to balloon in 2023 and 2024 by as much as 39 per cent, the report found.

“Every quarter that interest rates stay high results in more developing countries becoming distressed and facing the difficult choice of servicing their public debts or investing in public health, education and infrastructure,” said Indermit Gill, the World Bank Group’s chief economist and senior vice-president. 

The situation warrants quick and coordinated action by debtor governments, private and official creditors and multilateral financial institutions — more transparency, better debt sustainability tools, and swifter restructuring arrangements, he added. “The alternative is another lost decade.”

Interest payments consume an increasingly large share of low-income countries’ exports, the report released on December 13, 2023 found. More than a third of their external debt, moreover, involved variable interest rates that could rise suddenly. 

Currently, about 60 per cent of low-income countries are at high risk of debt distress or already in it, the report noted. Any further rise in interest rates or a sharp drop in export earnings could push the low-income countries over the edge, the authors warned.

Surging interest rates have intensified debt vulnerabilities in all developing countries. In the past three years alone, there have been 18 sovereign defaults in 10 developing countries, greater than the number recorded in all of the previous two decades.

Many of these countries face an additional burden: The accumulated principal, interest and fees they incurred for the privilege of debt-service suspension under the G20’s Debt Service Suspension Initiative (DSSI). 

While debt-servicing costs have climbed, new financing options for developing countries have dwindled. In 2022, new external loan commitments to public and publicly guaranteed entities in these countries dropped by 23 per cent to $371 billion, the lowest level in a decade. ”Private creditors largely abstained from developing countries, receiving $185 billion more in principal repayments than they disbursed in loans,” it said. 

That marked the first time since 2015 that private creditors have received more funds than they put into developing countries. 

Meanwhile, multilateral creditors provided $115 billion in new low-cost financing for developing countries in 2022, nearly half of which came from the World Bank.

“Knowing what a country owes and to whom is essential for better debt management and sustainability,” said Haishan Fu, chief statistician of the World Bank and director of the World Bank’s Development Data Group. 

“The first step in avoiding a crisis is having a clear picture of the challenge. And when problems arise, clear data can guide debt restructuring efforts to get a country back on track towards economic stability and growth,” Fu added. “Debt transparency is the key to sustainable public borrowing and accountable, rules-based lending practices, which are vital to ending poverty on a liveable planet.”

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