Global debt crisis deepens: Developing nations struggle under unprecedented financial strain
Dec 14, 2023
New Delhi [India], December 14 : Developing countries grappled with a historic debt burden in 2022, paying a staggering USD 443.5 billion in debt service costs, as revealed in the World Bank's 50th-anniversary International Debt Report.
According to the World Bank, the surge, attributed to the largest global interest rate increase in four decades, diverted vital resources from crucial sectors like health, education, and the environment.
Debt-service payments, encompassing principal and interest, rose by 5 per cent across all developing countries.
The 75 nations eligible for the World Bank's support saw a record USD 88.9 billion in debt-servicing costs, with interest payments quadrupling over the past decade, reaching USD 23.6 billion in 2022.
The report predicts a looming crisis, projecting a potential 39 per cent increase in debt-servicing costs for the poorest 24 countries in 2023 and 2024.
Indermit Gill, Chief Economist of the World Bank Group, warns that high debt levels and interest rates could push more countries towards distress, emphasizing the urgent need for coordinated action by debtor governments, creditors, and financial institutions.
Gill stated, "Record debt levels and high-interest rates have set many countries on a path to crisis. "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".
Gill added, "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. The alternative is another lost decade.''
Surging interest rates exacerbated vulnerabilities, resulting in 18 sovereign defaults in the past three years alone.
Approximately 60 per cent of low-income countries now face high debt distress or are already grappling with it.
The report underscores the increasing burden on low-income countries, where interest payments consume a significant share of exports.
With over a third of their external debt tied to variable interest rates, sudden rises could exacerbate their challenges.
The G-20's Debt Service Suspension Initiative adds an extra layer, as the stronger US dollar compounds payment difficulties.
As debt-servicing costs rise, new financing options dwindle. In 2022, external loan commitments dropped by 23 per cent to USD 371 billion, marking the lowest level in a decade.
Private creditors, receiving USD 185 billion more in repayments than disbursing in loans, contributed to this decline for the first time since 2015.
Facing a shortage of private financing, multilateral development banks, led by the World Bank, stepped in to fill the void.
They provided USD 115 billion in new low-cost financing in 2022, nearly half from the World Bank, highlighting the importance of their role in stabilizing developing economies.
The report concludes with a call for debt transparency, emphasizing its pivotal role in sustainable public borrowing.
Haishan Fu, Chief Statistician of the World Bank, asserts that a clear understanding of a country's debt profile is essential for effective debt management, guiding efforts to steer nations back towards economic stability and growth.
Fu said, "Knowing what a country owes and to whom is essential for better debt management and sustainability. 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. Debt transparency is the key to sustainable public borrowing and accountable, rules-based lending practices which are so vital to ending poverty on a livable planet."
The International Debt Report not only serves as a comprehensive analysis of the current debt landscape but also provides insights into emerging trends and the near-term outlook for debt in developing countries.
