World Bank: Developing countries spend record amounts on foreign debt!
Developing countries will spend a record $1.4 trillion (€1.3 trillion) to meet their external debt obligations in 2023, according to a new report from the World Bank. This came as many economies were forced to take on more external debt linked to the pandemic, the release said on Tuesday.
Last year, borrowing became more expensive as interest costs climbed to a 20-year high, a response to rising inflation. The devaluation of local currencies and uncertainty over global growth also added to the debt burden, which was most acute in poorer countries.
IDA countries, nations that receive aid from the World Bank's International Development Association, have paid $96.2 billion (€91.9 billion) to service their debt in 2023. Within that, interest costs reached their highest level all-time high of 34.6 billion dollars (33.05 billion euros).
On average, IDA countries' interest payments now amount to nearly 6% of IDA-eligible countries' export earnings, a level not seen since 1999. The World Bank noted that, during the period of financial instability last year, private creditors were extracting more money in debt payments from poorer regions than they were providing through loans.
By securing large returns on safer loans, these creditors felt less incentive to lend to poorer countries. The World Bank and other multilateral institutions bucked the trend, according to the new report.
In 2022 and 2023, they disbursed nearly $51 billion (€48.71 billion) more than they collected in debt service payments to IDA-eligible economies. The World Bank accounted for a third of this amount, 28.1 billion dollars (26.84 euros).
"The risk-reward balance cannot be allowed to remain as lopsided as it is today." said the World Bank, "with multilateral institutions and government creditors bearing almost all the risk and private creditors reaping almost all the benefits".
Default risk
The bank's report noted that most countries that faced distress last year decided to ride out the storm rather than fail. Nervous about procuring new loans, they sought to preserve their credit rating. However, to repay creditors, this often caused budget cuts in other areas, or money from the World Bank was channeled into paying off alternative loans.
During periods of financial difficulty, the World Bank switches from providing low-interest loans to providing grants to countries at high risk of distress. The organization is now working with borrowing countries to educate them about debt restructuring in a way that does not require reduced social investment.
Widening inequality
Developing countries have been particularly affected by the economic fallout after the pandemic. This is due to smaller fiscal stimulus offers and weaker health care systems. Current geopolitical tensions threaten further growth, as a number of countries move towards more isolationist trade policies.
On a more positive note, economic growth among low- and middle-income economies showed some resilience in 2023, as measured by gross national income (GNI). The debt-to-GNI ratio for low-income or middle-income economies excluding China fell by 0.8 percentage points in 2023. Countries eligible for IDA assistance showed a different pattern, the World Bank said.
The debt-to-GNI ratio of IDA-eligible countries increased by 1.9 percentage points in 2023. In response to rising debt levels, Indermit Gill called for more protection for sovereign borrowers. Just as businesses can restructure their debts, he argued that countries should be able to use similar measures without jeopardizing their ability to secure new loans.
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