Global debt crisis escalates as developing nations spend record $443.5 billion in debt servicing
Amidst the most significant surge in global interest rates in four decades, developing nations faced an unprecedented expenditure of $443.5 billion to meet their external public and publicly guaranteed debt obligations in 2022, according to the latest International Debt Report by the World Bank.
This surge in costs redirected scarce resources away from essential needs like health, education, and the environment.
Debt-service payments, encompassing both principal and interest, rose by 5% compared to the previous year for all developing nations. The 75 countries eligible for borrowing from the World Bank’s International Development Association (IDA), aimed at supporting the poorest nations, incurred a record $88.9 billion in debt-servicing expenses in 2022.
Over the last decade, interest payments by these nations quadrupled, reaching an all-time high of $23.6 billion in 2022. The report predicts a substantial increase, up to 39%, in overall debt-servicing costs for the 24 poorest countries in 2023 and 2024.
Indermit Gill, Chief Economist and Senior Vice President of the World Bank Group, warned, “Record debt levels and high interest rates have set many countries on a path to crisis,” emphasizing the urgent need for coordinated action to address the situation.
Surging interest rates have heightened debt vulnerabilities across all developing countries, leading to 18 sovereign defaults in the past three years alone, surpassing the total recorded in the previous two decades. Presently, about 60% of low-income countries are at a high risk of debt distress or are already experiencing it.
The report highlights that interest payments are consuming an increasingly large portion of low-income countries’ exports, with more than a third of their external debt involving variable interest rates that could suddenly rise. The stronger US dollar is compounding their challenges, making payments even more expensive. Further increases in interest rates or significant drops in export earnings could push these countries to the brink.
As debt-servicing costs escalate, new financing options for developing nations are diminishing. In 2022, new external loan commitments to public and publicly guaranteed entities in these countries plummeted by 23% to $371 billion—the lowest level in a decade. Private creditors, for the first time since 2015, received more funds than they invested in developing countries.
With private financing dwindling, multilateral development banks, including the World Bank, stepped in to bridge the gap. In 2022, multilateral creditors provided $115 billion in new low-cost financing for developing nations, with almost half coming from the World Bank.
In 2022, the combined external debt stock of these countries reached a record $1.1 trillion, more than double the 2012 level. Over the period from 2012 to 2022, IDA-eligible countries increased their external debt by 134%, outpacing the 53% increase in their gross national income (GNI).
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