Poor Nations Face Deepening Stagnation Amid Mounting Debt

(MENAFN- Gulf Times) The fallout from a mix of external shocks and mounting financial troubles are washing over low- and middle-income countries across the world.
The world's developing countries paid a record $1.4tn to service their debts last year, as high lending rates pushed interest costs to a two-decade high, according to the World Bank.
The poorest countries paid out more than $96bn to service their debts, the bank announced in its latest report on international debt, noting that interest costs alone amounted to almost $35bn.
Before the Covid-19, the world's poorer countries had a debt problem. The pandemic made it worse.
By the end of 2021, more than 70 low-income nations faced a collective debt burden of $326bn. Their debt service burden had more than doubled since 2010 as a percentage of gross national income, according to an earlier World Bank report.
In 2022, their annual debt payments totalled about $62bn, about 35% more than the year before. By early 2023, more than half of those were already in or near debt distress.
China began large-scale lending to developing and emerging nations after launching its Belt and Road infrastructure construction initiative in 2013. That programme was designed to improve its trading prospects while creating a broad sphere of Chinese influence - as well as contracts for Chinese construction companies.
The world's richer countries, meeting in the Group of 20 forum in 2020, created a coordinated plan for debt relief called the Common Framework.
The Common Framework was designed to coordinate debt relief offered by both public and private lenders and to set debt treatment standards across both traditional Western lenders and major new creditors like China.
An idea has emerged that the multilaterals need to protect their capital base and credit ratings to fulfil their development roles at the lowest costs. But China initially argued multilateral lenders should share losses like any other creditor.
Its position later shifted toward expecting the World Bank to increase lending instead - that is, multilaterals would share the burden by ponying up more money, rather than taking losses.
But China still has a limited role in the International Monetary Fund and the World Bank, where Europe and the US have long been dominant.
The high cost of servicing foreign debt has pushed many developing countries to borrow more money from multilateral institutions like the World Bank, stretching their finances.
“In highly indebted poor countries, multilateral development banks are now acting as a lender of last resort, a role they were not designed to serve,” World Bank chief economist Indermit Gill said in a statement last week.
“Except for funds from the World Bank and other multilateral institutions, money is flowing out of poor economies when it should be flowing in,” he added.
The latest World Bank report noted that high interest rates have been a key driver of the rising cost of servicing foreign debt, with the rate paid on loans from official creditors doubling to more than 4%.
Rates charged by private creditors were even worse, rising to a 15-year high of 6%; an increase of more than one percentage point.
Although interest rates have started to come down in many advanced economies, including the United States, overall,“they are expected to remain above the average that prevailed in the decade before Covid-19,” the Bank said.
Global public debt reached a record high of $97tn in 2023.
Although public debt in developing countries reached less than one third of the total – $29tn – since 2010 it has grown twice as fast as in developed economies, according the United Nations Conference on Trade and Development (UNCTAD).
Developing countries are now facing a growing and high cost of external debt, squeezing budgets for necessities including healthcare, education and the environment.

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