Research shows poor countries’ debt-interest payments have risen 35%
According to a World Bank assessment, the world’s poorest countries would spend 35% more in loan interest rates this year to cover the extra expense of the Covid-19 outbreak and a huge jump in the price of food imports.
More than £63 billion will be spent by the 75 poorest countries, many of which are in Sub-Saharan Africa, to repay loans taken out mostly in the previous decade and to hike interest rates.
The World Bank expressed worry that debt payments were devouring more of impoverished nations’ government spending at a time when they were already struggling to fund education and health care.
In a letter to affluent countries, the head of the Washington-based international development organisation warned of societal upheaval if impoverished countries were compelled to redirect funds from welfare programmes to debt interest payments.
“The debt crisis facing developing countries has intensified,” said the president, David Malpass.
“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.”
Zambia is one of several countries negotiating debt rescheduling to avoid default. Government authorities are asking $8.4 billion (£6.9 billion) in funding from key lenders, including private funds managed by BlackRock, the world’s largest investment manager, to help put its public finances back in order.
The study also blamed the issue on a sharp spike in the value of the dollar since 2019. Most loans are issued in dollars, and when the US dollar strengthens, the value of impoverished countries’ currencies falls, making it more difficult to fund their obligations.
The International Development Association (IDA), a World Bank subsidiary, is home to 75 of the world’s poorest countries. It has consented to billions of dollars in grants and interest-free loans, but these have not been enough to keep IDA debt from reaching $1 trillion.
Borrowing by poor countries has shifted away from richer governments – known as the Paris Club of lenders – and toward private banks and non-governmental sources, resulting in loan repayment times more than halving and interest rates skyrocketing.
According to the World Bank, the typical Paris Club loan was 25 years long, compared to 12 years for private lenders, and the average yearly interest rate jumped from 2% to 5%.
Most nations’ debts have risen in the previous two years to pay for welfare and health care during the epidemic, as well as to balance rising gas and food prices since the start of the Ukraine war.
However, impoverished nations have few options for raising taxes to fund rising expenditures, requiring them to seek costly loans from private lenders.
Following a lending frenzy to support major infrastructure projects over the last decade, China is on track to become the world’s largest single creditor to impoverished countries.
China is estimated to account for 66% of IDA nations’ formal bilateral loan servicing payments this year.
In a series of arrangements that are usually veiled by commercially secret treaties, India, Russia, and Turkey have also become big borrowers to poor nations.
According to the paper, debt-related risks are increasing for all developing countries, including middle-income economies.
The external debt of low and middle-income nations was $9 trillion by the end of 2021, more than double the amount a decade before.
According to Indermit Gill, the World Bank’s top economist, over 60% of the world’s poorest countries are either at high danger of or currently in a debt crisis.
He said that it was more difficult for impoverished countries to renegotiate and reschedule their obligations when they were tied into agreements with private banks in which the terms of the contract were not always disclosed or ambiguous.
“Poor debt transparency is the reason so many countries sleepwalk into a debt crisis,” said Gill. “Complete, transparent debt data improves debt management. It makes debt sustainability analyses more reliable. And it makes debt restructurings easier to implement so that countries can return quickly to economic stability and growth. It is not in any creditor’s long-term interest to keep public debt hidden from the public.”
By 2021, 61% of long-term public and publicly guaranteed debt worth $3.6 trillion was owing to private creditors rather than the Paris Club or other official creditors, up from 46% in 2010.
Malpass, a Trump appointment, has faced demands to shift the organization’s focus to climate change, mainly to assist impoverished Sub-Saharan African nations most threatened by harsh climates and growing debt levels.
In a second study released ahead of its 13th Debt Management Conference later this week, the United Nations Conference on Trade and Development (Unctad) stated that government debt levels as a proportion of GDP climbed in more than 100 developing countries between 2019 and 2021.
It stated that, without China, this rise is anticipated to be almost $2 trillion.
“Almost all developing countries have been left to face an impossible trade-off in a context marred by a pandemic, geopolitical instability and climate distress,” said Unctad secretary-general, Rebeca Grynspan.
“Debt cannot and must not become an obstacle for achieving the 2030 agenda and the climate transition the world desperately needs,” she added.
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online sources: theguardian.com, worldbank.org
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