Global Interest Rate Surge Pushes Developing Countries Toward Debt Crises

In the wake of the most significant surge in global interest rates in four decades, developing countries are grappling with record debt-service payments, risking a potential debt crisis, warns the World Bank's latest International Debt Report. 

The report reveals that in 2022, amid the escalating interest rates, developing nations spent a staggering $443.5 billion servicing their external public and publicly guaranteed debt, diverting crucial resources from essential sectors such as health, education, and the environment.

Debt-service payments, encompassing both principal and interest, rose by 5% across all developing countries compared to the previous year. The 75 countries eligible for World Bank's International Development Association saw debt-servicing costs reaching a record $88.9 billion in 2022. Interest payments by these countries have quadrupled over the past decade, reaching an unprecedented $23.6 billion in 2022, with an anticipated 39% surge in overall debt-servicing costs for the 24 poorest nations in 2023 and 2024.

Indermit Gill, the World Bank Group's Chief Economist and Senior Vice President, emphasized the gravity of the situation, stating, "Record debt levels and high interest rates have set many countries on a path to crisis. Every quarter that interest rates stay high results in more developing countries becoming distressed and facing the difficult choice of servicing their public debts or investing in public health, education, and infrastructure. The situation warrants quick and coordinated action by debtor governments, private and official creditors, and multilateral financial institutions."

The report notes that surging interest rates have heightened debt vulnerabilities globally, leading to 18 sovereign defaults in 10 developing countries in the past three years—exceeding the number recorded in the previous two decades. Approximately 60% of low-income countries are now at high risk of debt distress or already experiencing it.

Moreover, interest payments are consuming an increasingly significant portion of low-income countries' exports. The report emphasizes that over a third of their external debt involves variable interest rates that could spike suddenly, further intensifying their financial challenges. Many of these nations are also burdened by accumulated principal, interest, and fees incurred during the G-20's Debt Service Suspension Initiative, with the stronger US dollar exacerbating their difficulties.

As debt-servicing costs soar, new financing options for developing countries are dwindling. In 2022, new external loan commitments dropped by 23% to $371 billion—the lowest level in a decade. Private creditors, for the first time since 2015, received more funds than they disbursed to developing countries, with new bonds issued internationally plummeting by more than half in 2022.

With private financing shrinking, multilateral development banks, including the World Bank, stepped in to bridge the gap. Multilateral creditors provided $115 billion in new low-cost financing in 2022, with the World Bank alone contributing nearly half. Through IDA, the World Bank disbursed $16.9 billion more in new financing than it received in principal repayments.

The report marks the 50th anniversary of the International Debt Report, offering crucial insights from the World Bank's International Debt Statistics database. It underlines the importance of debt transparency for better management and sustainability, emphasizing the need for swift and coordinated global action to address the rising risk of debt crises among the world's poorest nations.