2023-12-14 09:44:38
Due to the sudden rise in interest rates, the debt of the poorest countries is exploding and threatens to sink them, warns the Washington-based institution.
Every year for half a century, World Bank releases report on debt in the world. The conclusions of its 2023 report are alarming: “ For the poorest countries, debt is poised to become a crippling burden », Writes Indermit Gill, the institution’s chief economist. From the 214 pages of this dry report, we can conclude that developing countries are on the verge of crisis, strangled by a debt which weighs more and more heavily on their budgets. To repay what they owe to private borrowers, to banks, to other states (like China or the United States, for example), or even to institutions like the IMF, these poor countries are obliged to “ divert resources which until now were used to finance health, hospitals, education or even the ecological transition », worries the World Bank, seeing it as an obvious obstacle to development.
The phenomenon is not anecdotal: “ Over the last three years, 18 countries have defaulted on their sovereign debt, more than in the previous two decades. », underlines Indermit Gill. African countries are particularly concerned: “ while the continent had “the lowest level of public debt in 2010 with 31.9% of GDP on average, Africa now has the highest in 2023 with 62.5% of GDP », writes the firm Global Sovereign Advisory (GSA) in a report published Thursday, December 14. Five of the ten emerging economies with the highest debt-to-GDP ratios in 2023 are in Africa: Zimbabwe, Egypt, Mozambique, Ghana and Angola. Debt favored by a period when interest rates were low and liquidity was abundant.
Refinancing difficulties
The sudden increase in interest rates, decided by central banks to curb inflation which followed the pandemic, the war in Ukraine and the rise in the price of raw materials and food products, changed everything. ” En a decade, interest rates in the 75 poorest countries in the world have increased fourfold », Underlines the World Bank. First consequence: repaying a loan now costs more. But these countries are also finding it increasingly difficult to borrow on the markets and to access new financing which could sometimes be used – in part – to repay past loans. A country which had borrowed for twelve years could, for example, take out a new loan a few years later for thirty years under more advantageous conditions because its financial situation had improved. A mechanism now seized up.
In the current context, banks no longer want to lend, and even less to countries in financial difficulty. The increase in interest rates decided mainly by the central banks of Western countries has also had the effect of making Treasury bonds issued by European countries or the United States more attractive. For a private investor, it has become more profitable to lend money to Germany, Japan or Canada, for example, while still being less risky than doing the same thing with a developing country. Some of which, like Zambia or Ghana, crushed by their debt, have defaulted in recent years.
$443 billion devoted to debt in 2022
If we add up everything that developing countries spent in 2022 on debt service (i.e. to repay their loans and pay interest), we arrive at $443.5 billion. A record figure underlines the World Bank. The day before the publication of this report, in Dubai, the States meeting at COP28 set in stone an estimate of the financial needs which should enable these same developing countries to adapt to global warming: 300 billion dollars per year. year. If tomorrow, with a snap of the finger, we erased the debt of developing countries, we would free up one and a half times this amount.
This is obviously not part of the World Bank’s recommendations, even if many NGOs have long advocated debt relief for the poorest countries, but the World Bank calls for concerted action by governments and financial institutions to restructure the debt of emerging countries and in particular the poorest. We have to move quickly: 60% of low-income countries are in danger of going under.
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