WASHINGTON (AN) – Much of the developing world continued to fall farther behind and deeper into economic crisis last year as loan payments and ballooning interest rates siphoned scarce capital away from health care, education and other social needs and transferred it to the coffers of international bankers.
In its latest International Debt Report, the World Bank says that in 2022, as interest rates had their biggest surge in four decades, developing countries found themselves spending a record US$443.5 billion to service their external public and publicly guaranteed debt.
Record debt levels coupled with high interest rates have put many countries on “a path to crisis,” says Indermit Gill, the World Bank’s chief economist.
There have been 18 sovereign defaults in 10 developing countries in the past three years alone as rising interest rates intensified debt vulnerabilities. That’s more, the bank says, than the total defaults recorded in the previous 20 years. Furthermore, about 60% of low-income nations are at high risk of debt distress.
Ethiopia missed a US$33 million bond payment this week. While Addis Ababa is trying to restructure its debt agreement with China and other lenders, it is widely expected that Ethiopia will join Zambia and Ghana as the latest African nation to default.
'Another lost decade'
The mounting debt payments forced on the developing world, Gill says, warrant “quick and coordinated action by debtor governments, private and official creditors, and multilateral financial institutions – more transparency, better debt sustainability tools, and swifter restructuring arrangements.”
Without such help, he warns, these developing nations and their people face “another lost decade.’’
Interest payments consume an increasingly large share of low-income countries’ exports and, with more than a third of their external debt tied to variable interest rates payments, could rise even higher.
A stronger U.S. dollar adds to the difficulties, making it even more expensive for countries to meet their obligations. A further rise in interest rates or a sharp drop in export earnings could push some of these countries over the edge, the World Bank warns.
Lenders pull back from developing countries
The bank says that as debt-servicing costs have climbed, new financing options for developing countries have dwindled.
New external loan commitments to public and publicly guaranteed entities in these countries dropped last year by 23% to US$371 billion, the lowest level in a decade. For their part, private creditors largely shied away from extending new loans to developing countries.
“This report makes it clear who has – and who has not – thrown a lifeline to countries struggling to meet key development objectives. As interest rates climbed in advanced economies, private creditors followed the money in 2022: they largely withdrew from developing countries,” Gill says.
These investors pulled in US$185 billion more in principal repayments than they disbursed in loans. That’s the first time since 2015 that private creditors have received more funds than they invested in developing countries.
New bonds issued by all developing countries in international markets dropped by more than half from 2021 to 2022, and issuances by low-income countries fell by more than three-quarters.
Many nations 'are really suffering'
The costs of servicing debt on public and publicly guaranteed debt are projected to grow by 10% for all developing countries over the 2023–24 period and by nearly 40% for low-income countries, Gill says.
U.S. Treasury Secretary Janet Yellen told a gathering of top business executives this week that debt relief was among the top issues that the United States and China, both major international lenders, must address.
“A lot of countries around the world are really suffering, especially with high interest rates from unsustainable debt burdens,” she said. “They need to restructure their debt and we need to cooperate to do it.”
