World Bank warns of mounting debt burden for poorer countries

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The world’s poorest countries face three years of soaring debt service costs, draining vital resources from spending on health, education and social assistance and leaving dozens of countries with unsustainable debts, the World Bank has warned.

A group of 69 low- and middle-income countries will make payments of $62bn on public debt this year, a 35 per cent increase from 2021, according to the bank’s annual data published on Tuesday.

Payments for 2023 and 2024 will remain elevated, the World Bank warned, due to high interest rates, a large number of bond maturities, and because countries have had to start making up for debt service that was deferred during the pandemic.

A surge in inflation has forced central banks to raise rates sharply this year, increasing global borrowing costs in the process. The dollar has also soared in value off the back of several large rate rises by the US Federal Reserve.

“The increased liquidity pressures in poor countries go hand in hand with solvency challenges, causing a debt overhang that is unsustainable for dozens of countries,” said David Malpass, World Bank president.

“With the 2022 growth outlook cut in half, interest rates much higher, and many currencies depreciating, the burden of debt is likely to increase further.”

Zambia and Sri Lanka are among the countries that have defaulted on sovereign debts since the start of the pandemic. Ghana and Egypt are in advanced stages of talks with the IMF over bailout packages.

This week, Ghana told holders of local currency government bonds to expect reduced coupon payments. Last month, it said the value of its foreign currency bonds could be cut by 30 per cent, although the IMF has yet to complete the debt sustainability analysis that would be the basis of any support package. Its currency, the cedi, has lost more than half of its dollar value this year, making it much harder to service dollar-denominated debts.

Such problems are far from isolated cases. The World Bank said nearly 60 per cent of low-income countries were at high risk of debt distress or already experiencing it.

The total external public and private sector debts of all low- and middle-income countries reached $9.3tn in 2021, up from $8.2tn in 2019 and $8.6tn in 2020, according to the World Bank’s annual debt statistics report published on Tuesday.

Many developing economies have put on a spurt of growth as they emerged from the pandemic. As a result, their debts fell as a share of gross national income to 25.7 per cent in 2021, from a peak of 28.5 per cent of GNI in 2020, the first year of the pandemic. This was below the pre-pandemic level of 26.3 per cent of GNI in 2019, according to the bank’s data.

But the debts of the poorest countries remained high last year both in absolute terms and as a share of national income. For the 69 countries eligible for assistance from the World Bank’s International Development Association, external debts fell only slightly to 36.2 per cent of GNI last year, from 36.8 per cent in 2020. That was higher than the 32.8 per cent recorded in 2019.

In dollar terms, their combined debts were $948bn last year, up from $767bn in 2019 and $859bn in 2020, according to World Bank data.

Global central banks cut interest rates to all-time lows and pumped trillions of dollars into the financial system through their quantitative easing programmes following the global financial crisis. Borrowing costs have remained at ultra-low levels until this year, triggering a large expansion in global debt.

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