- The World Bank reports that, as of 2022, low- and middle-income nations paid a record US$443.5 billion of their external public and publicly insured debt.
- Over the past decade, the increasing debt stock of these countries has outpaced economic growth, raising concerns about these economies’ ability to service their external obligations.
- The lender anticipates that over the course of 2023–2024, the cost of servicing rising debt will increase by roughly 10% for all developing nations and by 40% for low-income ones.
The World Bank has issued a warning that developing nations’ rising debt obligations are placing a strain on their budgets by taking money away from vital services such as health and education.
Latest statistics from the World Bank’s 2023 International Debt report show that low- and middle-income nations (LMICs), including Kenya, paid a record US$443.5 billion in external public and publicly insured debt.
“Over the past decade, the rise in the external debt stock of these countries has outpaced economic growth, raising concerns about these countries’ ability to service their debt,” the lender writes.
The situation is particularly concerning in the poorest nations that qualify for aid from the International Development Association (IDA), as their foreign debt stocks have increased more quickly than those of other LMICs.
This decade-long asymmetry between economic growth and rising debt has created or exacerbated debt vulnerabilities in many LMICs, and actions to address these vulnerabilities have become increasingly more urgent.
Currently, about 60 per cent of IDA-eligible countries are assessed at high risk of debt distress or are already in debt distress.
Read also: Depreciating shilling worsens Kenya’s debt and economic struggles
Projections and trends on rising debt
It further states that over the course of 2023–2024, it is anticipated that the cost of servicing public and publicly guaranteed debt will increase by roughly 10 per cent for all developing nations and by approximately 40 per cent for low-income nations.
“IDA-eligible countries are expected to have difficult times in the upcoming years; since 2012, interest payments on their overall stock of external debt have doubled to an all-time high of US$23.6 billion.
According to the lender, the payments are consuming an ever-larger share of export revenues, putting some developing states just one shock away from a debt crisis. Today, one of every four developing countries is effectively priced out of international capital markets.
In the past three years alone, the number of sovereign debt defaults in these countries has surged to 18, outstripping the total of the previous two decades. For the poorest countries, the rising debt has become a nearly paralyzing burden.
About 28 countries eligible to borrow from the World Bank’s International Development Association (IDA) are now at high risk of debt distress. Eleven are officially in distress.
Read also: Sub-Saharan Africa: growth slowdown as debt and instability bite
Steeper interest rates amid rising debt
The World Bank says these developments constitute a grave danger to prospects for progress on global development goals.
“Developing countries today also confront higher energy prices, steeper interest rates, and geopolitical turmoil in key regions of the world. It is a combustible mix, not unlike the conditions 50 years ago that prompted the World Bank to take a crucial step to advance debt transparency across the world,” it says.
This report by the lender further 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, pulling out US$185 billion more in principal repayments than they disbursed in loans,” it reads in part.
“This marked the first time since 2015 that they have withdrawn more funds than they put into developing countries.”
Key takeaways from the 2022 data on debt
External debt stock of LMICs fell in 2022 for the first time since 2015, decreasing by 3.4 per cent, to US$9.0 trillion from US$9.3 trillion recorded in 2021.
The decrease was due to negative debt flows, that is disbursements minus principal repayments, and the appreciation of the US dollar against other major currencies in which external debt of LMICs is denominated.
Long-term and short-term debt stocks fell at much the same pace, with the decline in long-term external debt stocks due primarily to the 5.0 percent decrease in obligations to private creditors.
The combined external debt stock of IDA-eligible countries rose 2.7 per cent in 2022 to an all-time high of US$1.1 trillion, more than double the 2012 level.
Total net debt flows (loan disbursements minus principal repayments) to LMICs turned negative in 2022 for the first time since 2015 to outflows of US$185 billion, a stark contrast to inflows of US$556 billion recorded in 2021.
Both short- and long-term debt flows were negative in 2022, US$90.6 billion and US$94.5 billion, respectively, with long-term debt flows at a record low and negative for the first time since the beginning of the millennium.
The fall in net long-term debt inflows was due entirely to the Us$189 billion outflow from private creditors, reflecting a sharp retrenchment in bond issuance by sovereigns and other public and private sector borrowers.
Tighter monetary policy in advanced economies to curb inflation raised borrowing costs, pricing some LMICs out of the markets, and offered investors attractive returns in the US and European bond markets.
As a result, there was a net outflow of US$127.1 billion from LMICs to bondholders in 2022, compared to an average annual inflow of US$202 billion in 2019–21.
Read also: Africa’s external debt hits $1.13 trillion on expensive loans
