The debt burden of the world’s low-income countries increased by 12% to a record $860-billion in 2020 owing to fiscal, monetary and financial stimulus packages issued in response to the Covid-19 pandemic, the World Bank reports.
It notes that debt reduction, restructuring and transparency are needed to help low-income countries overcome debt challenges.
Even prior to the pandemic, many low- and middle-income countries were in a vulnerable position, with slowing economic growth and public and external debt at elevated levels, the institution says.
“The external debt stocks of low- and middle-income countries combined rose by 5.3% in 2020 to $8.7-trillion. According to the new 'International Debt Statistics 2022' report, an encompassing approach to managing debt is needed to help low- and middle-income countries assess and curtail risks and achieve sustainable debt levels.”
The deterioration in debt indicators was widespread and impacted countries in all regions. Across all low- and middle-income countries, the rise in external indebtedness outpaced gross national income (GNI) and export growth.
Low- and middle-income countries’ external debt-to-GNI ratio, excluding China, rose to 42% in 2020 from 37% in 2019, while their debt-to-export ratio increased to 154% in 2020 from 126% in 2019.
“We need a comprehensive approach to the debt problem, including debt reduction, swifter restructuring and improved transparency. Sustainable debt levels are vital for economic recovery and poverty reduction,” says World Bank Group president David Malpass.
Overall, in 2020, net inflows from multilateral creditors to low- and middle-income countries increased to $117-billion, the highest level in a decade. Net debt inflows of external public debt to low-income countries increased by 25% to $71-billion, also the highest level in a decade.
Multilateral creditors, including the International Monetary Fund (IMF), provided $42-billion in net inflows, while bilateral creditors accounted for an additional $10-billion.
“Economies across the globe face a daunting challenge posed by high and rapidly rising debt levels. Policymakers need to prepare for the possibility of debt distress when financial market conditions turn less benign, particularly in emerging market and developing economies,” notes World Bank Group senior VP and chief economist Carmen Reinhart.
In response to the unprecedented challenges posed by the pandemic and at the urging of the World Bank Group and the IMF, international economic forum the Group of 20 (G20) launched the Debt Service Suspension Initiative (DSSI) in April 2020 to provide temporary liquidity support for low-income countries. The G20 countries agreed to extend the deferral period through the end of this year.
Further, in November 2020, the G20 agreed on a Common Framework for Debt Treatments beyond the DSSI, which is an initiative to restructure unsustainable debt situations and protracted financing gaps in DSSI-eligible countries.
“Greater debt transparency is critical in addressing the risks posed by rising debt in many developing countries. To facilitate transparency, International Debt Statistics 2022 was expanded to provide more detailed and disaggregated data on external debt.
“The data now gives the breakdown of a borrowing country’s external debt stock to show the amount owed to each official and private creditor, the currency composition of this debt, and the terms on which loans were extended,” the World Bank says.
For DSSI-eligible countries, the dataset was expanded to include the debt service deferred in 2020 by each bilateral creditor and the projected month-by-month debt-service payments owed to them throughout this year.
The World Bank will also soon publish a new 'Debt Transparency in Developing Economies' report that takes stock of debt transparency challenges in low-income countries and sets out a detailed list of recommendations to address them.