The World Bank’s most recent International Debt Report found that developing nations spent a record $1.4 trillion on foreign debt servicing in 2023, driven by a spike in interest rates to their highest levels in 20 years.
Spending in vital areas like health, education, and environmental initiatives was significantly impacted by the $406 billion in interest payments alone, an almost 30% rise from the year before.
The report claims that the most vulnerable economies—those that qualified for loans from the International Development Association (IDA) of the World Bank—were most financially affected.
In 2023, these nations made a record-breaking $96.2 billion in debt service payments.
Growing Interest Payments
According to the report, interest payments increased to an all-time high of $34.6 billion, four times the amount from ten years ago, while principal repayments decreased by 8% to $61.6 billion.
- IDA-eligible nations paid interest on their exports at an average rate of about 6%, which was last observed in 1999.
- This number increased to as much as 38% of export revenue for some countries, underscoring the gravity of the debt problem.
Multilateral Institutions As Vital Links
When credit conditions tightened, multilateral institutions like the World Bank became vital financial lifelines for low-income economies.
- According to the research, between 2022 and 2023, IDA-eligible economies paid $13 billion more in debt service to foreign private creditors than they did in financing.
- Multilateral organizations, on the other hand, provided $51 billion more in funding than they received in debt-service payments.
- The World Bank played a crucial role, contributing $28.1 billion in net support.
According to Indermit Gill, the Chief Economist and Senior Vice President of the World Bank Group, “multilateral development banks are now serving as lenders of last resort for highly indebted poor countries, a role they were not intended to serve.”
Cost Increases And Debt Rise
According to the World Bank, rising global interest rates made the COVID-19 pandemic’s impact on developing countries’ debt loads even more severe.
All low- and middle-income nations’ total external debt increased by 8% since 2020 to $8.8 trillion by the end of 2023. The overall external debt of IDA-eligible economies increased by almost 18% to $1.1 trillion.
“In 2023, borrowing overseas became significantly more expensive for all emerging countries. Interest rates on official creditors’ loans have increased to more than 4%. Rates charged by private creditors increased by more than a point to 6%, a 15-year high.
According to the Bank’s report, “global interest rates have since started to decline, but they are still anticipated to be higher than the average that prevailed in the ten years prior to COVID-19.”
Further Insights
- The most thorough and open source of information on developing nations’ external debt is the World Bank’s International Debt Statistics database, highlighted in the most recent International Debt Report.
- Comparing the data that these economies submit to the World Bank’s Debtor Reporting System with the data that is kept by G7 and Paris Club creditors shows an improved attempt to guarantee the accuracy of the debt data of IDA-eligible economies.
- The Bank claims that this loan-by-loan reconciliation process reduced the margin of error from 10 points to only two, resulting in a 98% match rate in the data.
