Developing nations spent a staggering $1.4 trillion on servicing foreign debts in 2023, marking an all-time high, according to the World Bank’s latest International Debt Report. This surge, attributed to the highest global interest rates in two decades, has significantly strained budgets for vital sectors like health, education, and environmental programs.
Rising Interest Payments
Interest payments accounted for $406 billion of the total debt-servicing costs in 2023, reflecting a 30% increase compared to the previous year. The report highlights how this has deepened financial pressures, particularly for the world’s most vulnerable economies—those eligible for support from the World Bank’s International Development Association (IDA).
These IDA-eligible countries paid a record $96.2 billion in debt servicing last year, with interest payments alone quadrupling over the past decade to reach $34.6 billion. While principal repayments decreased by 8% to $61.6 billion, the overall financial burden on these nations remained severe.
Export Earnings Impact
On average, IDA-eligible countries spent 6% of their export earnings on interest payments, a level last observed in 1999. For some countries, this figure skyrocketed to as much as 38%, underscoring the severity of the crisis.
Multilateral Institutions Offer Critical Support
As borrowing conditions tightened globally, multilateral institutions, including the World Bank, emerged as lifelines for low-income countries. Between 2022 and 2023, private creditors received $13 billion more in debt-service payments from IDA-eligible nations than they provided in financing.
In contrast, multilateral organizations contributed $51 billion more in funding than they collected in debt repayments, with the World Bank alone accounting for $28.1 billion of net support.
“Multilateral development banks are now acting as lenders of last resort for highly indebted poor countries, a role they were not designed to serve,” noted Indermit Gill, Chief Economist and Senior Vice President of the World Bank Group.
Debt Growth and Rising Costs
The report also reveals that the COVID-19 pandemic exacerbated the debt burden of developing nations, a problem further worsened by surging global interest rates.
By the end of 2023, the total external debt of low- and middle-income countries climbed to $8.8 trillion, an 8% increase since 2020. IDA-eligible economies alone saw their external debt rise by nearly 18%, reaching $1.1 trillion.
Borrowing costs also surged during this period. Official creditor rates doubled to over 4%, while private creditor rates increased by over a percentage point to 6%, a 15-year high. Although global interest rates have begun to decline, they remain elevated compared to pre-pandemic levels.
Enhanced Debt Transparency
The report highlights improved transparency in debt reporting for IDA-eligible countries. By matching data reported to the World Bank’s Debtor Reporting System with records held by G7 and Paris Club creditors, the Bank achieved a 98% match rate, reducing the margin of error significantly.
The Way Forward
The findings underscore the urgent need for structural reforms to address the growing debt challenges in developing nations. As global interest rates remain high, sustainable debt management and increased international support will be critical in safeguarding the economic stability of the world’s most vulnerable countries.
