The World Bank latest International Debt Report shows that developing countries spent a record $1.4 trillion on servicing foreign debt in 2023, largely due to a rise in interest rates to their highest levels in two decades.
The $406 billion in interest payments alone is a nearly 30% increase over the prior year. Spending in important areas, such as health, education, and environmental programs, is significantly impacted by this increase.
The report highlights that the most vulnerable economies, particularly those eligible for loans from the World Bank’s International Development Association (IDA), bear the brunt of the financial strain. These countries spend a record $96.2 billion on debt servicing in 2023.
While principal repayments fall by 8% to $61.6 billion, interest payments reach an all-time high of $34.6 billion, four times higher than a decade ago.
IDA-eligible countries, on average, allocate nearly 6% of their export earnings to interest payments, a level last seen in 1999. In some cases, this figure climbs as high as 38%, underlining the severity of the debt crisis.
Amid tightened credit conditions, multilateral institutions like the World Bank become crucial financial lifelines for low-income economies. The report reveals that from 2022 to 2023, foreign private creditors receive $13 billion more in debt-service payments from IDA-eligible economies than they disburse in financing. In contrast, multilateral institutions contribute $51 billion more in funding than they collect in debt-service payments. The World Bank alone provides $28.1 billion of the net support.
Indermit Gill, Chief Economist and Senior Vice President of the World Bank Group, emphasizes that multilateral development banks are now acting as lenders of last resort for highly indebted poor countries, a role they were not originally designed to serve.
The World Bank notes that the COVID-19 pandemic significantly increases the debt burdens of developing nations, a situation worsened by rising global interest rates. By the end of 2023, total external debt for all low- and middle-income countries rises to $8.8 trillion, an 8% increase since 2020. For IDA-eligible countries, external debt grows nearly 18% to $1.1 trillion.
Borrowing costs surge across the board. Interest rates on loans from official creditors double to over 4%, while rates from private creditors climb to 6%, a 15-year high. Though global interest rates are now easing, they are expected to remain above the pre-COVID-19 average.
Better insights from the World Bank’s extensive International Debt Statistics database are also provided in the International Debt Report. A 98% match rate in loan data from G7 and Paris Club creditors indicates a greater effort to improve data accuracy, particularly for IDA-eligible economies, according to the research. The data’s margin of error is much decreased by this improved procedure, going from 10 percentage points to just two.
