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Debt servicing costs in a clutch of the world’s poorest countries are set to soar to “crisis” levels as high interest rates damage already fragile economies, according to the World Bank.
Twenty-four of the world’s lowest income economies are set to spend a total of $21.5bn on financing their external public debt across this year and next, as bond repayments become due and the impact of higher interest rates feeds through, according to calculations from the bank in its latest debt report. That represents a rise of almost 40 per cent over the previous two years.
“Record debt levels and high interest rates have set many countries on a path to crisis,” said Indermit Gill, the World Bank Group’s chief economist.
“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.”
Bond markets have only partially recovered from a sharp sell-off that took benchmark Treasury yields to a 16-year high in October. The result has been to leave about one in four developing countries in debt distress and in effect shut out from international financing, according to World Bank calculations, a sharp boost from less than 5 per cent in 2019.
“For the poorest countries, debt has become a near paralysing burden,” said Gill. He added that rising borrowing costs constitute a “grave danger” to the prospects for progress on the UN’s global development goals and warrant “quick and co-ordinated” action by debtor governments, private and official creditors and multilateral financial institutions.
In the past three years alone, there have been 18 sovereign defaults in 10 developing countries including the likes of Zambia, Sri Lanka and Ghana — greater than the number recorded in all of the previous two decades, according to the World Bank.
Private creditors have also been pulling out of developing countries, leaving them with fewer financing options.
In 2022, new foreign loans to emerging market sovereigns dropped to their lowest level in a decade. Private creditors received $185bn more in repayments than they disbursed in loans, the first time since 2015 that private creditors have received more funds than they put into developing countries.
The World Bank forecasts that by the end of 2024, economic activity in low and middle income countries will be 5 per cent below pre-pandemic levels, with growth over the 2020-24 period projected to be the weakest five-year average since the mid-1990s.
In 2022, the latest year for which data is available, low and middle income countries paid a record $443bn to service their external and publicly guaranteed debt, a 5 per cent rise on the previous year, the World Bank report said. Interest payments alone have quadrupled over the past decade.
According to IMF forecasts, emerging market and middle-income countries’ average gross government debt burden is heading above 78 per cent of GDP by 2028, compared with just over 53 per cent a decade earlier.
Some of the world’s poorest countries also face an additional burden as they repay accumulated debt owed for participating in the G20’s debt service suspension initiative in 2020 and 2021, the exact costs of which, the World Bank said, will not be known until 2024.
“The costs will not be small,” Gill said. “Poor countries will need more help to ease their debt than they are receiving now”.
