In 2023, developing countries spent a record $1.4 trillion to service their foreign debt, as interest payments reached their highest level in two decades, according to the World Bank’s latest International Debt Report.
The sharp rise in debt servicing costs, fueled by global interest rate hikes, has put significant pressure on government budgets, particularly in critical sectors like health, education, and the environment.
The report highlights the severe financial strain on the poorest nations, showing that interest payments alone surged by nearly a third to $406 billion, further constraining government spending. Among the hardest hit are countries eligible to borrow from the World Bank’s International Development Association (IDA), which saw a record $96.2 billion in debt servicing costs in 2023. While principal repayments decreased by nearly 8% to $61.6 billion, interest costs skyrocketed to an all-time high of $34.6 billion—four times the amount recorded a decade ago.
On average, interest payments for IDA-eligible countries now account for nearly 6% of export earnings, the highest share since 1999. In some cases, the ratio is even more alarming, with interest payments eating up as much as 38% of export revenue.
Financial Strain on the Poorest Economies
The financial strain has been most pronounced in the poorest and most vulnerable economies. These countries, already grappling with limited resources, are facing mounting pressures as they strive to balance debt repayment with essential development spending. According to the report, the World Bank and other multilateral institutions have increasingly become the lifeline for these economies, stepping in to provide critical financial support.
Since 2022, public sector borrowers in IDA-eligible countries have made nearly $13 billion more in debt-service payments to foreign private creditors than they received in new financing. Meanwhile, multilateral institutions, including the World Bank, have injected nearly $51 billion more in financing than they collected in debt-service payments during the same period. The World Bank alone accounted for a third of this support, contributing $28.1 billion.
Indermit Gill, the World Bank Group’s Chief Economist, described the situation as a reflection of a “dysfunctional financing system.” He stated, “Except for funds from the World Bank and other multilateral institutions, money is flowing out of poor economies when it should be flowing in.” He further emphasized, “Multilateral institutions have become the last lifeline for poor economies struggling to balance debt payments with spending on health, education, and other key development priorities.”
Debt and Rising Interest Rates: A Perfect Storm
The COVID-19 pandemic exacerbated existing debt burdens across the developing world, and the subsequent increase in global interest rates has made it more difficult for many countries to recover. By the end of 2023, the total external debt of low- and middle-income countries reached a record $8.8 trillion, marking an 8% increase over 2020. For IDA-eligible nations, the increase was even more dramatic, with external debt rising by nearly 18% to reach $1.1 trillion.
The report also highlighted that borrowing costs for developing countries have risen sharply. Interest rates on loans from official creditors doubled to over 4%, while rates charged by private creditors jumped to more than 6%, a 15-year high. While global interest rates have begun to decline, they are expected to remain above the levels seen in the decade before the COVID-19 pandemic.
Improved Debt Transparency
Despite these challenges, the World Bank has made strides in improving transparency around developing countries’ debt. In 2023, nearly 70% of IDA-eligible countries published fully accessible public debt data on government websites, a significant increase from just 50% in 2020. This effort is part of the World Bank’s broader initiative to enhance debt transparency, reduce corruption, and encourage investment in these economies.
Haishan Fu, the World Bank’s Chief Statistician, emphasized that comprehensive debt data can prevent costly debt crises and improve investment prospects in developing countries. “The World Bank has played a leading role in improving debt transparency across the world, especially in IDA-eligible economies,” Fu said.
“In 2023, nearly 70% of these economies published fully accessible public-debt data on a government website—a 20-point increase since 2020. That is a hopeful sign for the future.”
The recent efforts to reconcile and verify debt data from various sources—including G7 and Paris Club creditors—have produced a near-perfect match rate of 98%, significantly improving the accuracy of the debt data for IDA-eligible countries.
As global financial conditions remain volatile, the strain on developing countries’ finances is likely to continue. While multilateral institutions like the World Bank have played a crucial role in mitigating the impact of rising debt costs, the ongoing challenges highlight the need for a more sustainable and balanced approach to global financing, especially for the world’s poorest economies.
For many African nations, including Burundi, which remain heavily reliant on foreign borrowing, the growing cost of debt servicing presents a formidable obstacle to achieving long-term development goals. With debt levels continuing to rise and interest rates remaining high, the coming years may prove pivotal in determining the trajectory of economic growth and stability for many nations across the continent.
