The World Bank in its latest International Debt Report, has revealed that developing nations spent an unprecedented $1.4 trillion on foreign debt servicing in 2023, driven by a surge in interest rates to their highest levels in 20 years,
Interest payments alone reached $406 billion, a nearly 30% increase from the previous year, severely impacting spending in critical sectors such as health, education, and environmental programs.
According to the report, the most vulnerable economies, those eligible for loans from the World Bank's International Development Association (IDA), bore the brunt of the financial strain.
These countries paid a record $96.2 billion to service their debts in 2023.
Interest payments on the rise
While principal repayments fell by 8% to $61.6 billion, the report shows that interest payments rose to an all-time high of $34.6 billion-four times the amount from a decade ago.
On average, IDA-eligible countries allocated nearly 6% of their export earnings to interest payments, levels last seen in 1999.
For some nations, this figure climbed as high as 38% of export earnings, highlighting the severity of the debt crisis.
Multilateral Institutions as Lifelines
As credit conditions tightened, multilateral institutions like the World Bank became critical financial lifelines for low-income economies.
The report noted that from 2022 to 2023, foreign private creditors received $13 billion more in debt-service payments from IDA-eligible economies than they disbursed in financing.
In contrast, multilateral institutions contributed $51 billion more in funding than they collected in debt-service payments.
The World Bank alone accounted for $28.1 billion of the net support, demonstrating its pivotal role.
"Multilateral development banks are now acting as lenders of last resort for highly indebted poor countries, a role they were not designed to serve," said Indermit Gill, Chief Economist and Senior Vice President of the World Bank Group.
Debt growth and rising costs
The World Bank said the COVID-19 pandemic significantly increased the debt burdens of developing nations, a situation exacerbated by soaring global interest rates.
At the end of 2023, total external debt for all low- and middle-income countries rose to $8.8 trillion, an 8% increase since 2020. For IDA-eligible economies, total external debt jumped nearly 18% to $1.1 trillion.
"In 2023, borrowing abroad became considerably more expensive for all developing economies. Interest rates on loans from official creditors doubled to more than 4%. Rates charged by private creditors climbed by more than a point to 6%-a 15-year high.
"Global interest rates have since begun to subside, although they are expected to remain above the average that prevailed in the decade before COVID-19," the Bank stated in the report.
More insights
The latest International Debt Report highlights key insights from the World Bank's International Debt Statistics database-the most comprehensive and transparent source of external debt data of developing countries.
It reflects an upgraded effort to ensure accuracy in the debt data of IDA-eligible economies-by matching data these economies report to the World Bank's Debtor Reporting System with data held by G7 and Paris Club creditors.
According to the Bank, this loan-by-loan reconciliation exercise produced a 98% match rate in the data, lowering the margin of error from 10 points to just two.
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