Record levels of debt and high interest rates have led many poor countries to spend approximately Shs335 trillion ($88.9 billion) on debt-servicing costs in 2022, as revealed by the World Bank’s international debt report for 2023. The escalating debt-servicing expenses raise concerns about these countries being at a heightened risk of entering a debt crisis.
The report discloses that debt-service payments, encompassing both principal and interest, increased by 5 percent across all developing countries in comparison to the previous year. Specifically, the 75 countries eligible to borrow from the World Bank’s International Development Association (IDA) paid a record Shs335 trillion ($88.9 billion) in debt-servicing costs in 2022.
Dr Indermit Gill, the World Bank Group’s chief economist and senior vice president, emphasized the critical situation, stating that the combination of record debt levels and high interest rates poses a risk for many countries. The ongoing scenario forces developing nations to make tough decisions between servicing public debts and investing in essential areas like public health, education, and infrastructure.
Dr Indermit urged quick and coordinated action by debtor governments, creditors, and financial institutions, emphasizing the need for transparency, improved debt sustainability tools, and efficient restructuring arrangements. Failing to address these challenges may result in another lost decade for the affected countries.
Countries eligible to borrow from IDA, as highlighted by Dr Indermit, are likely to face difficulties in the coming years. Interest payments on their total external debt have quadrupled since 2012, reaching an all-time high of $23.6 billion. These payments are consuming a growing share of export revenues, leaving some nations just one economic shock away from a potential debt crisis, especially considering that over a third of this debt involves variable interest rates that could suddenly rise.
To mitigate the challenges, multilateral development banks, including the World Bank, have stepped in to close the financing gap. In 2022, multilateral creditors provided a record $115 billion in new financing for developing countries, with almost half coming from the World Bank. This assistance is crucial, especially for the poorest countries, where multilateral creditors were the primary source of new financing.
For example, Uganda, one of the 75 poorest nations borrowing from IDA, has seen its debt-servicing costs rise in recent years due to increased borrowings. The Finance Ministry reported a significant portion of Uganda’s public debt being constituted by fixed interest rate debt, with variable interest rates accounting for 21.29 percent.
The report underscores that interest payments are consuming an increasingly large share of low-income countries’ exports. More than a third of their external debt involves variable interest rates, adding to the challenges they face. The accumulated principal, interest, and fees incurred during debt-service suspension initiatives further burden these countries. The report concludes that a further rise in interest rates or a sharp drop in export earnings could push them over the edge, highlighting the urgent need for sustainable debt management.
