July 18, 2023
A world of debt
Public debt can be vital for development. Governments use it to finance their expenditures, to protect and invest in their people, and to pave their way to a better future.
However, it can also be a heavy burden, when public debt grows too much or too fast. This is what is happening today across the developing world. Public debt has reached colossal levels, largely due to two factors.
- Financing needs soared with countries’ efforts to fend off the impact of cascading crises on development. These include the COVID-19 pandemic, the cost-of-living crisis, and climate change.
- An inequal international financial architecture makes developing countries’ access to financing inadequate and expensive.
The weight of debt drags down development. Debt has been translating into a substantial burden for developing countries due to limited access to financing, rising borrowing costs, currency devaluations and sluggish growth. These factors compromise their ability to react to emergencies, tackle climate change and invest in their people and their future.
Countries are facing the impossible choice of servicing their debt or serving their people. Today, 3.3 billion people live in countries that spend more on interest payments than on education or health. A world of debt disrupts prosperity for people and the planet.
This must change.
The United Nations has a road map of multilateral actions to address the global debt burden and achieve sustainable development. The roadmap is laid out in Our Common Agenda Policy Brief on Reforms to the International Financial Architecture and the SDG Stimulus, which focuses on three areas of action:
- tackling the high cost of debt and rising risks of debt distress,
- massively scaling up affordable long-term financing for development, and
- expanding contingency financing to countries in need.
The implementation of these actions is crucial to unleash the resources needed to build a more prosperous, inclusive, and sustainable world.
Public debt around the world has been on the rise over the last decades. Cascading crises in recent years triggered a sharp acceleration of this trend. As a result, global public debt has increased more than fivefold since the year 2000, clearly outpacing global GDP, which tripled over the same time.
In 2022, global public debt – comprising general government domestic and external debt – reached a record USD 92 trillion. Developing countries owe almost 30% of the total, of which roughly 70% is attributable to China, India and Brazil.
However, public debt has increased faster in developing countries compared to developed countries over the last decade. The rise of debt in the developing world has mainly been due to growing development financing needs – exacerbated by the COVID-19 pandemic, the cost-of-living crisis, and climate change – and by limited alternative sources of financing.
Consequently, the number of countries facing high levels of debt has increased sharply from only 22 countries in 2011 to 59 countries in 2022.
Inequalities in the international financial architecture
Developing countries are dealing with an international financial architecture that exacerbates the negative impact of cascading crises on sustainable development. The burden of debt on development is intensified by a system that constrains developing countries access to development finance and pushes them to borrow from more expensive sources, increasing their vulnerabilities and making it even harder to resolve debt crises.
Borrowing from foreign creditors increases exposure to external shocks
Developing countries’ total public debt increased from 35% of GDP in 2010 to 60% in 2021. Similarly, external public debt, the part of a government’s debt owed to foreign creditors, increased from 19% of GDP to 29% of GDP in 2021.
Comparing debt levels to developing countries’ ability to generate foreign exchange through exports shows that their ability to generate sufficient revenue to service their external debt obligations has also been deteriorating. The share of external public debt to exports increased from 71% in 2010 to 112% in 2021. During the same period, external public debt service as a share of exports increased from 3.9% to 7.4%.
Developing countries face additional major challenges due to high levels of external public debt, which make them more vulnerable to external shocks. When global financial conditions change or international investors become more risk-averse, borrowing costs can shoot up suddenly. Similarly, when a country’s currency devalues, debt payments in foreign currency can skyrocket, leaving less money for development spending.
Relying on private creditors makes credit expensive and debt restructuring complex
Private creditors, such as bondholders, banks, and other lenders, offer financing on commercial terms. In the past ten years, the portion of external public debt owed to private creditors has risen across all regions, accounting for 62% of developing countries’ total external public debt in 2021.
The increasing share of public debt owed to private creditors presents two challenges. First, borrowing from private sources is more expensive than concessional financing from multilateral and bilateral sources. Second, the growing complexity of the creditor base makes it more difficult to successfully complete a debt restructuring when needed. Delays and uncertainties increase the costs of resolving debt crises.
Developing countries pay much more for their debt than developed ones
When developing countries borrow money, they have to pay much higher interest rates compared to developed countries, even without considering the costs of exchange rate fluctuations. Countries in Africa borrow on average at rates that are four times higher than those of the United States and even eight times higher than those of Germany. High borrowing costs make it difficult for developing countries to fund important investments, which in turn further undermines debt sustainability and progress towards sustainable development.
Facing impossible choices: servicing debt or serving their people
Developing countries’ debt trends have caused a rapid increase in total public interest payments relative to the size of their economies and government revenues. Currently, half of developing countries devote more than 1.5% of its GDP and 6.9% of its government revenues for interest payments, a sharp increase over the last decade.
The rise of interest payments is a widespread problem. The number of countries where interest spending represents 10% or more of public revenues increased from 29 in 2010 to 55 in 2020.
Developing countries pay much more for their debt than developed ones
When developing countries borrow money, they have to pay much higher interest rates compared to developed countries, even without considering the costs of exchange rate fluctuations. Countries in Africa borrow on average at rates that are four times higher than those of the United States and even eight times higher than those of Germany. High borrowing costs make it difficult for developing countries to fund important investments, which in turn further undermines debt sustainability and progress towards sustainable development.
Some regions spend more on servicing debt than serving their people
In Africa, the amount spent on interest payments is higher than spending on either education or health. Developing countries in Asia and Oceania (excluding China) are allocating more funds to interest payments than to health. Similarly, in Latin America and the Caribbean, developing countries are devoting more money to interest payments rather than to investment. Across the world, rising debt burdens are keeping countries from investing in sustainable development.
An increasing number of countries find themselves trapped in a situation where both their development and their ability to manage debt is compromised. Currently at least 19 developing countries are spending more on interest than on education and 45 are spending more on interest than on health. In total, 48 countries are home to 3.3 billion people, whose lives are directly affected by underinvestment in education or health due to large interest payment burdens.
Source: United Nations Conference on Trade and Development UNCTAD
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