Reducing poverty and hitting global net zero goals are being hindered by the severe debt burdens on poor countries, the president of the World Bank has said, amid growing concern that high interest rates could cause dozens of countries to default.
Ajay Banga, the new head of the Washington-based body, urged faster progress in providing debt relief but said there was no “magic wand” that could be waved to make the problem go away, at a press conference at the Bank’s annual meeting in Marrakech.
Indermit Gill, the World Bank’s chief economist, said the last time the Federal Reserve had raised interest rates as aggressively as it had recently was more than 40 years ago, and the result was that 24 countries went bankrupt.
Their comments came as the US treasury secretary, Janet Yellen, said she planned to meet the head of China’s central bank, Pan Gongsheng, for talks that would include possible closer cooperation on debt.
Relations between Washington and Beijing are frosty but, amid growing pressures on indebted countries as a result of higher global interest rates, Yellen said more help was needed.
China has become one of the world’s leading creditor nations and its support is needed if countries are to receive help through the common framework – a debt relief mechanism set up by the G20 group of leading developed and developing nations in 2020 but which has been criticised for slowness and offering little tangible help.
Yellen said: “Though progress has been slow and certainly needs to be improved … we have seen some meaningful progress. I’m hopeful more progress can be made.”
A report from Debt Service Watch, a coalition of debt campaign groups, said the outlook for developing countries was worse than during the Latin American debt crisis of the 1980s and during the two rounds of multilateral debt relief in the late 90s and mid-2000s.
Debt service was absorbing 54% of budget revenue and 40% of public spending in Africa, the report said. Spread across all continents, 35 countries were paying more than half of their revenue servicing their debts, and 54 over one-third.
The figures were more than twice the levels faced by low-income countries before the heavily indebted poor country initiative of the 1990s and the multilateral debt relief initiative of 2005; and slightly higher than those paid by Latin American countries in the 80s.
According to the Debt Service Watch report the five countries with the highest debt servicing costs as a share of revenue are Egypt, on 196%, Sierra Leone (169%), The Gambia (165%), São Tomé and Príncipe (137%) and Malawi (133%).
Four countries – Chad, Zambia, Ethiopia and Ghana – have applied for debt relief through the common framework.
Debt payments were crowding out spending to confront social and environmental crises. Debt service was 50% higher than combined spending in African countries on education, health, social protection and climate.
“Developing countries need another major round of debt cancellation”, the report said. Current debt relief deals were failing to provide poor countries with the scope to spend more on achieving the UN 2030 sustainable development goals, with the latest restructuring deals leaving debt service at an average 48% of revenue over the next three to five years.
“The international community must take urgent steps to reduce debt service much more sharply, through enhanced debt relief and reduced borrowing costs,” the report said.
Matthew Martin, the director of Development Finance International, said: “This is a silent crisis. Countries might not yet be defaulting but millions if not billions are suffering every day. People are not prepared to do anything about it but they have to deal with it. If they don’t there will be more migration and more instability.”
Banga said that if the common framework were to be replaced there needed to be a “good idea” of what would take its place. “I wish there was a magic wand and I could say abracadabra but I don’t think there is.”
