WASHINGTON (AN) — For the poorest of the poor, things are about to get even worse before they get better.
Already under the hammer of the pandemic, climate change, escalating commodity and energy costs, food insecurity, ballooning interest payments and, in many places, civil unrest, the state of the global economy offers only more bleak news for the developing world, according to the World Bank’s latest update.
The bank forecasts growth in developing economies slowing in 2023 to 2.9%, down from 4.1% in 2022. Growth globally is expected to slow to 2.1% this year, far down from the 3.1% global growth in 2022. In Europe, economists reported on Thursday the eurozone economy slipped into a mild recession in the first quarter of 2023.
The global economy is in an uncertain state, says the World Bank's latest Global Economic Prospects report. While the causes are broad and complex, the Washington-based international financial institution cites the negative shocks of Russia’s invasion of Ukraine, the lasting impact of COVID-19, and the hawkish tightening of monetary policy, especially in the United States, to reign in inflation.
Global economic growth is projected to slow significantly throughout the rest of the year and into the next, with a steep drop in the price of energy and other commodities, remaining "frail" even as it starts "inching up" again in 2024.
Sailing in 'dangerous waters'
Up to now, most developing economies have seen only limited harm from the recent upheavals in the banking industry; but says the World Bank, “they are now sailing in dangerous waters.”
As interest rates soar and lenders tighten restrictions on borrowing, the bank says, one in four developing nations finds itself without access to international bond markets.
The squeeze is even tighter for countries with low creditworthiness, crippling their ability to grow and making them vulnerable to what the bank terms “additional shocks.”
“The world economy is in a precarious position,” said Indermit Gill, the bank’s chief economist. “In emerging markets and developing economies, debt pressures are growing due to higher interest rates. Fiscal weaknesses have already tipped many low-income countries into debt distress.”
Spending more on debt than health and education
The Brookings Institution, a Washington policy think tank, reports that almost 60% of the world’s poorest nations are either in or at high risk of debt distress, a number that has nearly doubled since 2015.
Interest and other payments on debt owed by the world’s poorest nations rose to over US$50 billion in 2021. Repayments now represent 11.3% of government revenue in the poorest countries, up from 5.1% in 2010.
“In most developing countries, the cost of servicing external debt now exceeds expenditures on health, education, and social protection combined,” its report said.
For now, economists at the World Bank offer little hope for the poorest nations, saying their room to maneuver has narrowed as they’ve taken on more debt and watched their deficits grow.
"High debt-service payments could limit governments’ ability to respond to future emergencies," the bank's latest update says. "South Asia is the most vulnerable emerging market and developing economy region to shocks related to climate change."
The bank’s most recent forecasts suggest that the economic shocks of the last few years and the resulting general economic slowdown have dealt an “enduring setback” for the economies of the developing world that will persist for the foreseeable future.
Economic growth will be well below the levels projected on the eve of the pandemic. In many poor nations per capita incomes in 2024 will remain below 2019 levels, a scenario that threatens to entrench extreme poverty in many low-income countries.
A legacy of colonialism and slavery?
The World Bank and International Monetary Fund, also based in Washington, are so-called “Bretton Woods” institutions because they were set up to rebuild postwar Europe and promote international cooperation at a U.S.-led meeting of 43 nations at Bretton Woods, New Hampshire in July 1944.
Since that time, but especially in the 21st century, their missions have shifted to focus more on global development and fighting poverty.
The Group of 20 major economies agreed to a framework for more debt relief among poor nations under a program known as the Debt Service Suspension Initiative, or DSSI, called for by the World Bank and IMF. The program also has the backing of Paris Club officials from major creditor countries, and has helped dozens of countries that are eligible to participate.
But it's far from enough; the global debt crisis has only intensified further. As of the end of 2022, the poorest countries were spending more than a tenth of their export revenues to service their long-term public and publicly guaranteed external debt — the highest proportion since 2000, according to World Bank data.
Brookings suggests a plan to restructure high-cost debt owed to the private sector with a scheme capitalized by international financial institutions and bilateral donors. The plan would allow the indebted nations to issue bonds that could be used to retire outstanding private loans at longer and more favorable terms.
Oxfam International maintains that the Group of Seven wealthy democracies owe distressed countries in the Global South US$13 trillion in pledged but unfulfilled aid and funding for the dire effects of climate change.
The international anti-poverty organization is calling for an immediate solution to the debt crisis: writing off the loans of all poor nations that are unable to pay.
Oxfam estimates that these developing economies have been shelling out more than a quarter of a billion dollars a day to service outstanding debt. The World Bank said the poorest countries alone spent US$62 billion servicing debt in 2022 – up 35% from the previous year.
“It’s the rich world that owes the Global South,” said Amitabh Behar, Oxfam’s interim executive director. “The aid they promised decades ago but never gave. The huge costs from climate damage caused by their reckless burning of fossil fuels. The immense wealth built on colonialism and slavery.”
