Developing countries spent a record $1.4 trillion (€1.3 trillion) on foreign debt repayments in 2023, according to the World Bank. Pandemic-driven borrowing, rising interest costs, and weakening currencies amplified debt burdens, particularly for the poorest nations.
Nations eligible for International Development Association (IDA) assistance faced acute challenges, paying $96.2 billion (€91.9 billion) in debt service. Of this, interest costs hit a historic high of $34.6 billion (€33.05 billion). On average, interest payments consumed nearly 6% of these nations’ export earnings, a level unseen since 1999.
Private Creditors Retreat as Debt Burdens Rise
Poorer countries faced dwindling support from private creditors, who prioritized securing returns on safer loans. These creditors extracted more in debt payments than they lent, reducing support during financial crises.
Conversely, multilateral institutions like the World Bank provided crucial support. In 2022 and 2023, they disbursed $51 billion (€48.71 billion) more than they collected in debt service payments from IDA nations. The World Bank alone accounted for $28.1 billion (€26.84 billion) of this sum.
“The risk-reward balance is unsustainable,” said World Bank Chief Economist Indermit Gill, criticizing a system where private creditors benefit while public institutions bear most risks.
Social Spending Suffers Amid Default Fears
To avoid default, many nations prioritized creditor repayments over social investments in health, education, and infrastructure. These cuts strained services critical for long-term development.
The World Bank noted that, during distress, countries used its funding to repay alternative loans. To ease this burden, the bank provides grants instead of loans for nations at high risk of default.
Efforts are underway to teach borrowing nations how to restructure debt without sacrificing social investments. Indermit Gill emphasized that sovereign borrowers need protections similar to those available to businesses.
Growing Inequality and Debt Challenges
Post-pandemic economic fallout has widened inequality. Developing nations had weaker fiscal support and healthcare systems, leaving them vulnerable to global disruptions. Geopolitical tensions and protectionist trade policies threaten their recovery further.
While middle-income economies excluding China showed resilience, with a slight decrease in their debt-to-GNI ratio, IDA-eligible countries saw their debt-to-GNI ratio rise by 1.9 percentage points in 2023.
Gill called for international consensus to allow nations to restructure debts without jeopardizing future borrowing. “Without such measures, development goals will remain at risk,” he warned.
This growing debt crisis highlights the urgent need for equitable reforms to support the world’s poorest nations.
