Addressing rising debt costs in developing economies

Developing economies around the world are grappling with a significant debt challenge as interest costs soar to a 20-year high, according to the World Bank's latest International Debt Report. The report reveals that these countries spent a record $1.4 trillion to service their foreign debts last year, hampering budgets for vital services such as healthcare, education, and the environment. CNBC Africa spoke with Ayhan Kose, Deputy Chief Economist at the World Bank, to delve into the implications of rising debt costs on low and middle-income nations. Kose highlighted the pressing concerns and challenges facing developing economies, shedding light on the key findings of the report. Kose emphasized three critical points from the report. Firstly, developing nations allocated a record $1.4 trillion to service their foreign debt in 2023, marking the highest amount in the last two decades. The surge in interest rates led to a nearly one-third increase in interest payments on this debt, exceeding $400 billion. Secondly, lower-income developing economies now face interest payments amounting to nearly 6% of their export earnings, a level unseen since 1999, with some countries reaching as high as 40% of their export earnings. Thirdly, credit conditions have tightened, with multilateral development banks like the World Bank emerging as the primary source of financial assistance for these struggling economies, while private sector creditors withdraw funds, worsening the debt burden. Before the pandemic, debt burdens for developing economies were already on the rise. The onset of the COVID-19 crisis further exacerbated the situation, leading to a triple increase in primary deficits for low-income countries, particularly in sub-Saharan Africa. Government debt in these regions has surpassed 70%, nearing a two-decade high, with almost half of the economies at risk of falling into debt distress. In the context of sub-Saharan Africa, Kose highlighted the challenging trade-offs countries face due to limited fiscal space. The need to cut essential expenditures in areas like education and infrastructure to service debt obligations is hampering growth and increasing vulnerability to external shocks, especially with elevated interest rates prevailing in international capital markets. Looking ahead to 2025, Kose expressed caution regarding the trajectory of debt service costs for developing nations, noting that while global interest rates are expected to decrease, they are likely to remain high for governments grappling with payment difficulties. While some emerging developing economies are poised for growth, the overall pace remains insufficient to alleviate the mounting debt service burdens. Moreover, persistent global risks like armed conflicts, trade fragmentation, and inflation further compound the challenges for low to middle-income countries. The World Bank has ramped up efforts to support these nations, with a significant portion of lending directed towards Africa to address emergencies and crises like natural disasters and food insecurity. Despite progress in enhancing debt transparency, Kose emphasized the need for continued collaboration between governments and creditors to improve understanding of debt composition and terms. Enhancing debt management capacity and promoting transparency in lending practices are crucial steps towards mitigating the debt burden faced by developing economies. In conclusion, the mounting debt service costs and challenges posed by rising interest rates are looming threats to the economic stability and development prospects of developing nations. Collaborative efforts and strategic interventions are essential to address these pressing issues and ensure sustainable economic recovery for low and middle-income countries.