According to the World Bank’s new International Debt Report, the poorest countries eligible to borrow from the World Bank’s International Development Association (IDA) now spend more than a tenth of their export revenues to service their long-term public and publicly guaranteed external debt—the highest proportion since 2000, shortly after the Heavily Indebted Poor Countries (HIPC) initiative was established.
The report highlights the growing risks associated with debt for all developing economies, including those with low and middle incomes. These economies will have $9 trillion in external debt at the end of 2021, which is more than double the amount they had a decade ago.
The total external debt of IDA nations nearly tripled to $1 trillion during the same time period. A large number of nations run the risk of entering debt crises as a result of slowing global growth and rising interest rates. Around 60% of the most unfortunate nations are now at high gamble of debt misery or currently in trouble.
According to the report, debt-service payments on long-term public and publicly guaranteed external debt for IDA-eligible nations totaled $46.2 billion by the end of 2021. This is equivalent to 10.3% of their exports of goods and services and 1.8% of their GNI. Compared to 2010, when they stood at 3.2% and 0.7%, these percentages were significantly higher.
One of the highest annual increases over the past two decades is anticipated for IDA countries’ debt-service payments on their public and publicly guaranteed debt in 2022, which are expected to rise by 35% to more than $62 billion. China is supposed to represent 66% of the obligation administration installments to be made by IDA nations on their official reciprocal debt.
David Malpass, president of the World Bank Group, stated,
“The debt crisis facing developing countries has intensified. A comprehensive approach is needed to reduce debt, increase transparency, and facilitate swifter restructuring—so countries can focus on spending that supports growth and reduces poverty. Without it, many countries and their governments face a fiscal crisis and political instability, with millions of people falling into poverty.”
On the surface, debt indicators seem to have improved in 2021, the report shows. As economic growth resumed following the global recession in 2020, public and publicly guaranteed external debt as a share of GNI returned to pre-pandemic proportions. However, this was not the case for IDA countries, where the debt- to-GNI ratio remained above the pre-pandemic level at 25%. Moreover, the economic outlook has deteriorated considerably.
Global growth is sharply slowing down in 2022. The likelihood of a global recession next year is increasing amid one of the most globally coordinated episodes of monetary and fiscal policy tightening in 50 years. For many developing nations whose debt is based on U.S. dollars, currency depreciations have made matters worse. As a result, the improvement in debt-to-GNI in 2021 is probably only temporary.
The debt owed by IDA nations has significantly changed over the past decade. The proportion of external debt that is owed to private creditors has dramatically increased. Low- and middle-income economies owed private creditors 61% of their public and publicly guaranteed debt at the end of 2021, up 15 percentage points from 2010.
By the end of last year, countries eligible for the IDA owed private creditors 21% of their external debt, a 16-point increase from 2010. Additionally, the proportion of debt owed to government creditors outside of the Paris Club—China, India, Saudi Arabia, the United Arab Emirates, and others—has increased dramatically.
China held 49 percent of the IDA countries’ bilateral debt stock at the end of 2021, up from 18 percent in 2010. Countries in debt distress now have a much harder time quickly restructuring their debt because of these developments.
In order to strengthen nations’ abilities to manage debt risks and utilize resources effectively for sustainable development, the rising vulnerability of debt underscores the urgent need to increase debt transparency and provide more comprehensive debt information.
According to the World Bank Group Senior Vice President and Chief Economist Indermit Gill, “poor debt transparency is the reason so many countries sleepwalk into a debt crisis.”
Debt management is improved by having complete, transparent debt data. It improves the reliability of debt sustainability analyses. Additionally, it facilitates debt restructuring, allowing countries to quickly return to economic growth and stability. It is not in the long-term interests of any creditor to conceal public debt.
An improvement in debt transparency can be seen in the most recent International Debt Report. The most comprehensive source of comparable cross-country information on the external debt of low- and middle-income countries is the World Bank’s International Debt Statistics database. By adding substantial analysis and expanding the data’s breadth and specificity, it outperforms the earlier International Debt Statistics reports.
The International Debt Statistics database has discovered and added $631 billion in previously unreported loan commitments over the past five years, and an additional $44 billion was discovered in 2021. Over the past five years, these newly documented additional loan commitments amount to more than 17% of the total public and publicly guaranteed debt stock that will be in circulation in 2021.