Much of the World Facing Debt Distress

60% of low-income countries, and at least 25% of middle-income countries, are in debt distress or at high risk of debt distress.

In an essay published shortly before he left his role as World Bank president, David Malpass warned that “[e]xcessive government debt raises doubts about whether the private economy can produce enough output and profit to carry the burden….” He wrote, “Government debt levels, both current and projected, are an order of magnitude larger than in previous crises, undercutting growth.”

What started as a global economic slump during the COVID-19 pandemic has turned into the highest rate of government debt in decades. While 2021 saw modest signs of growth in some advanced economies, Russia’s invasion of Ukraine took a toll on global commodity markets, stymieing economic recovery. As Malpass noted in his essay, these forces weigh especially heavily on low-income countries.

At the same time, the world’s central banks have aggressively tightened their monetary policy to rein in inflation. Much of the government debt that was accrued by these low-income countries to carry them through the global downturn will be due in the next couple of years, and the rise in interest rates will make it increasingly difficult for countries to meet their repayments. Over a five-year period, developing countries may need as much as $2.5 trillion to meet their external debt service cost.

Unfortunately, the international community has a tendency to regard developing country debt as sustainable, somehow believing that with modest belt tightening, they can get themselves back in the black. But in many places, the sacrifice required is not only unsustainable, it’s like saying that a poor family can stay afloat because they always pay back their loan sharks. This view also overlooks the hopes, dreams, and needs of these countries’ young populations. Foregoing investments in health, education, and other builders of prosperity will save money in the short run, but hinder development in the longer term. Put another way, the family may be able to repay their debt, but they might be ruined in the process.

This blog was complied with the assistance of Caroline Moody.