World Bank warns that developing economies are being dogged by record debt
Rising interest rates are saddling the world’s poorest countries with record levels of debt and hampering investments in public health, education and infrastructure initiatives crucial to lifting their people out of poverty, the World Bank warned on Wednesday.
In its latest report on international debt, the World Bank said that low- and middle-income countries will have paid $443.5 billion in principal and interest in 2022. That is the highest level in history and an increase of 5 percent from 2021. The organization predicted that the total would increase by almost 40 percent in 2023 and 2024. The bank estimated that more than half of the world’s low-income countries were facing debt problems and called for a restructuring of their obligations to avoid a “lost decade.”
“Record debt levels and high interest rates have put many countries on a path to crisis,” said Indermit Gill, chief economist at the World Bank.
The World Bank pointed to variable interest rates on the debt that many developing countries owe and are finding it difficult to repay as a looming threat to their solvency. The bank also noted that the stronger U.S. dollar, which has made these countries’ currencies less valuable in global markets, has made repayment more expensive.
Governments have defaulted on their debts 18 times in the past three years, including in countries such as Zambia, Sri Lanka and Lebanon. That exceeds the total number of defaults over the past two decades, underscoring how unsustainable the debt burden has become.
The dire situation has also made it more difficult for developing countries to attract new investments and financing. According to the World Bank, new loan commitments to developing countries fell 23 percent last year to $371 billion. It was the first time since 2015 that private creditors received more money than they invested in developing countries.
The rising debt burden has put additional pressure on multilateral development institutions such as the World Bank to provide cheap loans to poor countries. International coalitions such as the Group of 20 have also pushed to accelerate debt relief, but these efforts have been slow.
China, the world’s largest creditor, has been criticized for being an obstacle to debt restructuring deals due to its reluctance to accept losses on its loans. Earlier this year, China reached an agreement in principle with Zambia to restructure $4 billion in debt, but the deal has not yet been finalized due to lingering concerns over concessions from some of its creditors.
Sri Lanka, which went bankrupt last year, is also working on a restructuring package with creditors such as China, Japan and India.
With rich countries facing their own high debt burdens and global economic growth remaining sluggish, relief for developing economies could remain elusive.
Treasury Secretary Janet L. Yellen said Wednesday at a Wall Street Journal CEO Council event that debt relief is one of the most important issues the U.S. and China must tackle together, and it is a regular topic of discussion with her. Chinese counterparts.
“Many countries around the world are really suffering, especially from high interest rates, because of unsustainable debt burdens,” Ms. Yellen said. “They need to restructure their debt and we need to work together to do that.”