The World Bank has warned that the world’s poorest countries are facing three years of rising debt servicing costs, draining vital resources from spending on health, education and social assistance, and leaving scores of countries with unsustainable debt.
A group of 69 low- and middle-income countries will make $62 billion in payments on public debt this year, an increase of 35 percent from 2021, according to the bank’s annual data published on Tuesday..
The World Bank has warned that 2023 and 2024 payments will remain high, due to higher interest rates, a large number of bond maturities, and because countries have had to start making up for debt service that has been deferred during the pandemic.
Rising inflation has prompted central banks to sharply raise interest rates this year, driving up global borrowing costs in the process. The dollar also appreciated on the back of several large interest rate increases by the US Federal Reserve.
“Increasing liquidity pressures in poor countries go hand in hand with solvency challenges, causing dozens of countries to build up unsustainable debt,” said David Malpass, President of the World Bank.
“With growth projections for 2022 cut in half, interest rates much higher, and many currencies depreciating, the debt burden is likely to grow even further.”
Zambia and Sri Lanka are among the countries that have defaulted on sovereign debt since the start of the pandemic. Ghana and Egypt are in advanced stages of talks with the International Monetary Fund on bailout packages.
This week, Ghana told holders of local currency government bonds to expect reduced coupon payments. Last month, it said the value of its foreign-currency bonds could drop by 30 percent, though the International Monetary Fund has yet to complete a debt sustainability analysis that will be the basis of any support package. Its currency, the cedi, has lost more than half of its dollar value this year, making it very difficult to service dollar-denominated debt.
Such problems are not isolated cases. The World Bank said that nearly 60 percent of low-income countries are at high risk of debt distress or are already experiencing it.
Total external public and private debt for all low- and middle-income countries reached $9.3 trillion in 2021, up from $8.2 trillion in 2019 and $8.6 trillion in 2020, according to the World Bank’s annual debt statistics report published on Tuesday.
Many developing economies achieved a growth spurt as they emerged from the pandemic. As a result, its debt as a share of GNI fell to 25.7 percent in 2021, from a peak of 28.5 percent of GNI in 2020, the first year of the pandemic. This was down from the pre-pandemic level of 26.3 percent of gross national income in 2019, according to bank data.
But the debt of the poorest countries remained high last year, both in absolute terms and as a proportion of national income. For the 69 countries eligible for assistance from the World Bank’s International Development Association, external debt fell only slightly to 36.2 percent of gross national income last year, from 36.8 percent in 2020. This was higher than the 32.8 percent recorded in 2019.
In dollar terms, their debt totaled $948 billion last year, up from $767 billion in 2019 and $859 billion in 2020, according to World Bank data.
Global central banks cut interest rates to all-time lows and pumped trillions of dollars into the financial system through quantitative easing programs in the aftermath of the global financial crisis. Borrowing costs have remained at very low levels until this year, leading to a significant expansion of global debt.