The world's poorest countries are facing ever-expanding debt service payments, record refinancing costs, limited market access, and severely reduced capital inflows. Without action, 2024 will see further increases in debt vulnerability, potentially leading to setbacks in development outcomes.
In this context, the current global debt relief framework primarily focuses on countries with solvency issues, including the "Common Framework," which remains crucial. However, there is less attention on a specific group of countries: low-income and lower-middle-income countries, which may experience temporary liquidity pressures in 2024 and 2025 due to very high levels of external debt repayments. These countries have not yet encountered solvency issues and therefore do not qualify for the "Common Framework" or comprehensive debt restructuring. However, they urgently need liquidity support in 2024-2025 to mitigate significant external debt refinancing risks. While this is a subset of the larger issue of debt vulnerability, without assistance, liquidity problems may turn into solvency issues. This, in turn, would exacerbate the perception of risk for such countries, further restricting capital inflows and accelerating capital outflows. Additionally, this would increase the number of countries already in debt distress and heighten solvency issues.
In 2022, we saw capital flowing out of developing countries, the private sector contracting, while debt service payments continued. Although market sentiment towards large emerging economies may improve in 2024, these improvements are unlikely to extend to the poorest countries that are in most urgent need.
In 2023, low-income economies and some lower-middle-income countries (designated as IDA countries by the World Bank, as they can access this highly concessional financing tool) paid approximately $74 billion in external debt on their public and publicly guaranteed debt. This is an increase of over 45% compared to 2022. When combined with debt service on domestic debt, these countries' total debt service payments in 2024 are expected to exceed $185 billion, about 7.5% of their combined GDP. This figure is on average higher than their total public spending on health, education, and infrastructure. All of this occurs in a context where fiscal space has largely been eroded.
Complicating matters further, financing conditions are tight, and interest rates are prohibitively high for many low-income and lower-middle-income countries, limiting their ability to even access global debt markets. In 2023, the average spread on bonds in sub-Saharan Africa remained above 1000 basis points. As interest rates in developed economies rise, private investors are turning to low-risk assets, abandoning marginal markets in pursuit of historically high returns. Other inflows, particularly syndicated loans, have also declined significantly.
To help alleviate the net outflow of liabilities from these countries, extensive liquidity support may be needed for low-income and lower-middle-income countries. Some official creditors have already taken action, including the World Bank. Since the COVID-19 pandemic, the IDA has provided a significant amount of net positive, highly concessional funding inflows. However, more support is still needed. Multilateral institutions can leverage available cheap and concessional resources to support the refinancing of external debt through credit enhancement, facilitate market-friendly debt management operations, and additionally provide net positive inflows. In some cases, debt-for-development swaps can also be strategically utilized to help countries smooth their debt amortization curves while supporting high-impact development projects. However, the demand for liquidity and development financing is enormous, so all these solutions require new resources to be supplemented. Countries can undertake necessary fiscal reforms, promote climate action measures and projects, and make progress on sustainable development goals.
Time is of the essence; 2024 will be a critical year to prevent further escalation of debt vulnerability, which is vital for restoring the development trajectory of the world's poorest countries.
Source
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Urgent need to address liquidity pressures in developing countries, World Bank Blogs.