Why low-income nations are ‘cracking’ under debt pressure | Devex

[Gunnar Larson]

"Inside DevelopmentFinance
Why low-income nations are ‘cracking’ under debt pressure
By Shabtai Gold // 06 June 2023

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The High debt servicing costs are also preventing governments from making
climate investments that will help prevent worsening disasters such as
droughts and floods.

The world’s poorest 28 nations, with a combined population of more than 700
million people, now spend, on average, about 11% of their total government
expenditures just on debt interest payments — double what they spent a
decade ago, the data show.

The interest payments, combined with the government wage bills, make up
nearly half of all public expenditures, leaving vastly reduced fiscal space
for spending on everything else. The problems were brewing for years and
were made worse by the COVID-19 pandemic, which has been pushing poverty
rates higher.

“These economies are unable to recover from the pandemic, it’s as simple as
that,” Ayhan Kose, the deputy chief economist at the bank, told Devex.

“We see some of these countries are cracking in terms of making debt
payments,” he added.


Interest payments as a percentage of total spending. It’s effectively
doubled since 2011, depriving countries of money they could otherwise spend
on health and education. Combined with wages for salaries, this eats up
nearly half of all government spending. Dotted line denotes
trendline.Source: World Bank.

Source: World Bank.
“Because their debt burdens have doubled over the past decade, interest
payments are now taking a bigger bite out of government revenues. This
diverts even more funding from health and education,” said Franziska
Ohnsorge, a leading economist at the bank.

These are two sectors where the lowest-income nations were “already
spending significantly less than other developing economies,” she added.

Ohnsorge authored a special chapter in the latest biannual World Bank
Global Economic Prospects report released Tuesday and which focuses on the
plight of the poorest 28 countries.

The report comes at a critical time, as more nations slip into
unsustainable debt burdens.

More reading:

► Scoop: World Bank creating new fund for the poorest nations, Ukraine

► Interview: World Bank's Malpass says 'urgent' debt relief is needed

► IMF warns of 'gloomy' economy rife with uncertainty and high inflation

About half of the 28 countries are in debt distress or very close, and the
rest are all at risk — a sharp increase from 2015, the bank’s latest data
shows. This leaves many of them unable to borrow to fund their development
or paying very high prices on their borrowings, causing the heavy debt
repayment problems.

“The bill is coming due,” said Ohnsorge. The debt-to-GDP ratio, a quick
measure of the sustainability of the borrowings, has jumped over the last
decade by 30 percentage points, reaching 67% on average.


Comparing low-income countries in 2015 and in 2023. No countries out of the
28 are at the low-risk level now. The number in debt distress has shot up.
Source: World Bank
Also notable in the new data is the climate costs for the poorest
countries. The investments needed to protect these nations from natural
disasters is nearly four times as high as in advanced economies, when
measured as a fraction of national GDP.

While wealthier nations would need to spend less than 2% of their gross
domestic product to ensure a low-carbon and climate resilient economic
growth pathway, in low-income countries that surges to more than 8%.


The lowest-income nations will need to pay the most, as a percentage of
their income, to build up climate resilience. World Bank estimates.
“That’s why I am saying it’s too much. They cannot finance it themselves,”
Ohnsorge said of the climate needs.

Also notable: These poorest nations are often suffering from climate
change, but their contribution to emissions is negligible — 0.3 metric tons
per capita annually, compared to a global average of about 4.6 — and has
barely changed in the past 20 years.

Another issue is what Ohnsorge calls “chronic revenue weakness,” which
means the countries are simply struggling to raise money domestically,
through taxes, for example. This leaves the governments vulnerable to
sinking deeper into debt distress. Inefficient spending also means that
money gets wasted — which the bank is working with governments to fix.

The World Bank is calling for creditors from the Group of 20 major
economies to offer debt relief to the poorest nations and help them
restructure the borrowings. Past efforts by the G20 on debt since COVID-19
hit have failed. But with the situation getting worse, advocates are
pushing for a fresh attempt to halt a downward spiral.

The topic will be on the table at an upcoming conference on the global
financial system to be held in Paris later this month and hosted by French
President Emmanuel Macron. One idea is suspending debt payments for
countries hit by natural disasters.

https://www.devex.com/news/why-low-income-nations-are-cracking-under-debt-pressure-105670?access_key=&utm_source=nl_newswire&utm_medium=email&utm_term=article&utm_content=cta&mkt_tok=Njg1LUtCTC03NjUAAAGM8ws9xND57IyIJbShNPg0m0HwJkYMbsFRPR5TiqMptUSg0J2-8ScH9DO7YuVmULGkZxF_ZIPz6Ee4EI46y8Plc3WQ1qcjD99U646AdDbvvEjGhr0
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