The World Bank’s latest International Debt Report reveals that developing countries spend a record $1.4 trillion on servicing foreign debt in 2023, driven by a surge in interest rates to their highest levels in two decades.
Interest payments alone total $406 billion, marking a nearly 30% increase from the previous year. This surge severely impacts spending in critical sectors, including health, education, and environmental programs.
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.
The International Debt Report also offers improved insights from the World Bank’s comprehensive International Debt Statistics database. The report reflects a heightened effort to enhance data accuracy, especially for IDA-eligible economies, with a 98% match rate in loan data from G7 and Paris Club creditors. This upgraded process significantly reduces the margin of error in the data, from 10 percentage points to just two.
