Debt repayments are putting low-income countries under immense pressure as debt service costs rise to levels not seen in two decades, the World Bank said, while urging the international community to deliver “swift and substantial debt relief” to vulnerable nations.
The payments on public debt made by 69 of the lower-income nations will total more than $62 billion this year, a 35% increase over 2021. These countries are spending over a tenth of their export revenues to service their public external debt, a proportion not seen since 2000.
A whopping 66% of their repayments on official loans are going to China, the bank said Tuesday in its flagship annual report on debt. Beijing’s official bilateral debt stock grew from 18% in 2010 to 49% in 2021, as it became an ever more important creditor for the world’s lower-income countries.
For the broad category of “developing economies,” total external debt reached $9 trillion at the end of 2021, more than double compared to a decade earlier. The low-income countries saw their debt reach $1 trillion, tripling since 2010.
“A debt crisis in the world’s poorest countries is intensifying,” World Bank President David Malpass told reporters ahead of the report’s launch.
The World Bank president will be heading to China this week along with other heads of international organizations, including International Monetary Fund Managing Director Kristalina Georgieva, for talks set to include discussions on debt. He pledged to push for “faster progress on resolving unsustainable debt.”
Where in 2010 China had just $15 billion in loans to low-income nations, that number now stands at $100 billion, according to the Washington-based anti-poverty lender.
Without a better debt restructuring system, poverty will rise and essential services, including health and education, will be hurt. Action on the climate will also be negatively impacted, Malpass warned, acknowledging it is a “grim outlook.”
Among the low-income countries, about 60% are listed as being at high risk of debt distress or already in distress.
The Washington-based institution considers the poorest countries to be those eligible to borrow from the International Development Association, or IDA, a fund at the bank with the most concessional lending terms.
Malpass noted that the debt crisis is also hitting middle-income nations, as the combination of high debt levels, rising interest rates, and slowing global economic growth because of the pandemic and Russia’s invasion of Ukraine are all coinciding.
The bank’s data showed that lower-income countries have seen their official public debt owed to private creditors rise by 15 percentage points since 2010, and now stands at 61% of the total amount. Malpass said the debt ownership is “making restructurings difficult.”
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As China and private creditors rise in importance, the classic group of high-income Western nations known as the Paris Club is no longer the biggest segment of bilateral creditors to low-income countries, rendering old mechanisms for debt relief increasingly less relevant. The Paris Club’s share of bilateral public debt dropped to 32%, compared to 58% in 2019.
“New mechanisms are needed to reflect the new creditor landscape,” Malpass said.
The bank, he told reporters, has been warning about the problems for a number of years, both as debt increasingly became unsustainable and as the lender realized the old systems for restructuring are not fit for purpose.