Dec 19, 2023 - Economy

There's a brewing debt crisis in poor countries

Illustration: Sarah Grillo/Axios

The consequences of decades-high interest rates around the world are still rippling across the global economy, and some of the poorest nations are buckling under the historic debt burden.

Why it matters: It is one of the lagged effects of a worldwide tightening campaign that looks to be over.

  • Still, the aftermath is being felt across low-income countries as global interest rates soar — making it more expensive to pay off debt and drawing parallels to the crisis of the 1980s.

What they're saying: "The longer that interest rates stay high, the more likely they are going to get in trouble," World Bank chief economist Indermit Gill told reporters last week. "We are hoping that interest rates do start coming down."

Where it stands: Over the past three years, there were 18 sovereign defaults—where a nation failed to make a debt payment — across 10 developing countries, the World Bank said in its latest annual debt report.

  • That's more than the total in the previous two decades combined. Historic borrowing during the era of rock-bottom rates — particularly during COVID-19 — is now starting to bite.
  • On the list of defaults: Ghana, Zambia and Sri Lanka. Next is likely Ethiopia, whose finance minister said last week that it was set to miss the 14-day grace period for an interest payment due this month.

By the numbers: Excluding China, external debt as a share of gross national income among low-to-middle-income nations actually fell nearly 4 percentage points in 2022, according to the World Bank — a decline that came solely because of a stronger U.S. dollar.

  • But the ratio remains historically high: In 2022, it was 33% — up 6 percentage points from the prior decade.
  • For the poorest nations, it's more bleak: External debt rose to 46% of gross national income, from 29% in 2012.

The big picture: For a group of 75 low-income countries, interest payments on external debt loads have quadrupled since 2012, setting an all-time high of about $24 billion.

  • "These payments are consuming an ever-larger share of export revenues, putting some countries just one shock away from a debt crisis," the World Bank writes in the report.

Between the lines: The upshot is nations are dedicating more revenues to make debt payments rather than investing proceeds domestically. It's made the call for lower interest rates louder, according to Nicole Goldin, a fellow at the Atlantic Council and former World Bank economist.

  • "Many countries are forced to divert spending from education, health, or infrastructure to service debt even as financing becomes less available and more expensive," she says.
  • "It is undermining growth and ultimately disproportionately impacting those already facing economic insecurity or marginalization, i.e. women, youth, rural and remote communities," Goldin adds.

The intrigue: These countries face a double whammy of pricier debt and harder-to-get financing.

  • Private lenders have retrenched as investing in lower-to-middle-income nations looks riskier. For the first time since 2015, private creditors withdrew more funds than they put into developing nations last year, according to the World Bank.

The bottom line: "The whole world is struggling now with too much debt, too little private investment, weakening trade and slowing economic growth," Gill said.

  • Developing nations are facing consequences of "higher energy prices, steeper interest rates, and geopolitical turmoil in key regions of the world. It is a combustible mix," Gill notes in the report.
Go deeper