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

The lowest-income nations are spending far too much on servicing their unsustainable levels of debt, leaving them cash-strapped and unable to make the investments they need to break cycles of poverty, according to new World Bank data. 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. “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. 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. 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%. “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.