As 2023 comes to a close, the World Bank commemorated the fiftieth year of publishing their International Debt Report with the news that developing countries shelled out a record $443.5 billion in 2022 to service their public and publicly guaranteed debt, an increase of 5% over the previous year.
According to the World Bank, the 75 countries that are eligible to borrow money from the World Bank’s International Development Association (IDA), which strictly focuses on the poorest nations, paid an all-time record high of $88.9 billion in 2022 just on debt servicing costs. Furthermore, debt servicing costs for the 24 poorest countries on the planet are expected to drastically expand by as much as 39% in 2023 and 2024.
“Record high debt levels, combined with high-interest rates, have put many countries on a path to crisis,” said Indermit Gill, the World Bank Group’s Chief Economist and Senior Vice President. “Developing countries are forced to service their public debts or invest in public health, education, and infrastructure.”
In the past three years alone, 10 developing countries underwent 18 sovereign defaults, which is more than all of the defaults combined in the 20 years before that. On top of that, around 60% of low-income countries are at a high risk of debt distress or already in it. Compounding the misery further, more than a third of the public debt held by low-income countries involves variable interest rates that are at risk of sudden increases. And heavily indebted low-income countries face yet another burden: the accumulated principal, interest, and fees that they currently owe for having participated in the pandemic era’s G-20’s Debt Service Suspension Initiative (DDSI) in 2020 has made it even more expensive for these countries to service their debts.
Unfortunately, the news continues to get worse for heavily indebted, low-income nations. IDA-eligible countries have been taking on debt that far exceeds their own economic growth. From 2012 to 2022, IDA-eligible countries increased their external debt by 134%, vastly outpacing the much more modest 53% increase in their gross national incomes (GNI).
A time of rising fears
In his forward to the 2023 International Debt Report, Indermit Gill, used somber words indeed to describe a world besieged by destabilizing economic forces that are increasing the risk of low-income countries “tumbling” into a debt crisis.
Currently, one out of every four developing countries is already shut off from international capital markets, and debt has become a “nearly paralyzing” burden for many. Already, 28 countries eligible to borrow from the World Bank’s IDA are classified as being at a high risk of debt distress, and 11 already are in distress. Further compounding the issue is the fact that developing countries are confronting higher energy prices, steeper interest rates, and ongoing geopolitical turmoil.
Gill declares that the publication should “sound an alarm” about the danger confronting low-income nations and that the poorest among them are facing a “rough ride in the coming years” as interest payments alone have quadrupled since 2012. As such, debt payments are consuming an ever-larger share of developing countries’ resources, leaving them just one shock away from a debt crisis.
In addition to ever-increasing debt service and interest payments, the developing nations struggling the most have largely been cut off from private creditors due to rising interest rates. In 2022, private creditors pulled out $185 billion more in principal repayments than they disbursed in loans. Not since 2015 have private creditors withdrawn more funds than they put into developing countries.
The authors of the report, however, note that their own organization was one of the last remaining creditors to “throw a lifeline” to these heavily indebted nations. Through the IDA, the World Bank disbursed $6.1 billion in grants to low-income countries, three times the amount that it gave in 2012. And in 2022, the IDA provided $16.9 billion more in new financing for these countries than it received in principal repayments.
50 years of tracking international debt statistics
2023 marks the fiftieth anniversary of the World Bank’s annual publication on external debt, and the organization notes, without irony, that history has come full circle in many ways. The authors draw many parallels between the present and 1973, which was the year that the Bretton Woods international monetary system was abandoned, and a conflict in the Middle East led to record-high inflation rates, higher energy, and commodity prices, and many of the world’s strongest economies sank into recession.
The authors of the 2023 International Debt Report also note that fifty years after their organization set a goal to assist lower-income nations, their challenge remains exactly the same today: unsustainable debt levels and debt servicing costs are once again on the rise, fueling predictions of another impending debt crisis. In 1973, the World Bank declared itself a “champion” of debt transparency, believing that the public disclosure of public debt constituted an important public gowd, a stance that they steadfastly maintained ever since. And while updated reporting requirements and new technologies have increased the accuracy and clarity of that data, there is little tangible evidence that policymakers have done much with that information.
Key takeaways from the 2023 International Debt Report
The 2023 International Debt Report soberly notes that the total debt owed by lower and middle-income nations (LMICs) has steadily been on an upward trajectory since 2016 and that it skyrocketed beginning in 2020 in the wake of the pandemic. Furthermore, debt accumulation has greatly outpaced economic growth in developing nations, raising “serious concerns” about their ability to service that debt. Even worse, the very poorest nations have taken on debt levels at an even faster pace than other low and middle-income nations.
A few key takeaways from the report:
- Total net debt flows (loan disbursements minus principal repayments) to LMICs turned negative in 2022 for the first time since 2015, with an outflow of $185 billion. In contrast, in 2021, there was an inflow of $556 billion. Furthermore, both short and long-term debt flows were negative in 2022, entirely due to the $189 billion outflow from private creditors.
- The ratio of external debt to gross national income (GNI) for LMICs fell by 2% in 2022, to 24%.
- Over the past 10 years, low-income countries took on external debt at a faster rate than middle-income countries. For low-income countries, their debt burden increased by 109% between 2012 and 2022 whereas their GNI only rose 33%. For middle-income countries, debt levels rose 58% as compared to their GNI, which grew by 51%. For IDA-eligible countries, debt levels grew by 134% over the same period, in contrast to their GNI only growing by 53%.
- Whereas private creditors have largely abandoned LMICs, multilateral creditors increased their loans in 2022 to LMICs by 1.5% to $115.6 billion. The World Bank Group itself provided $53.5 billion in lending or 46% of all commitments provided by multilateral institutions, an all-time high for the organization.
- Public and publicly guaranteed debt service payments by LMICs reached an all-time high of $443.5 billion in 2022 and are only forecast to keep growing. Debt service alone is expected to rise at least 10% in 2023-2024. As a result, servicing debt will increasingly “crowd out” government spending on everything else in LMICs.
The International Debt Report as well as other data collected by the World Bank continues to serve as the only public repository of debt-related information for most countries.
