06-December-2024-Editorial

GLOBAL DEBT CRISIS: INSIGHTS FROM INTERNATIONAL DEBT REPORT 2024

The International Debt Report 2024 by the World Bank and the UNCTAD report, A World of Debt 2024, shed light on the escalating global debt crisis. These reports highlight the challenges faced by developing nations in managing soaring debt levels and rising borrowing costs, exacerbated by global economic strains. Below is a simplified overview of the reports’ findings and the way forward.

Key Findings of the International Debt Report 2024

Rising Debt Levels

• The external debt of low- and middle-income countries (LMICs) reached an all-time high of USD 8.8 trillion by 2023, showing an 8% increase since 2020.
• For nations eligible for International Development Association (IDA) support, external debt increased by 18%, reaching USD 1.1 trillion.
• The IDA, a World Bank entity, provides concessional loans and grants to the poorest nations struggling with low income and weak creditworthiness.

Escalating Debt Servicing Costs

• LMICs spent USD 1.4 trillion on debt servicing in 2023, including a record USD 406 billion in interest payments, a 33% jump from previous years.
• These high debt costs are diverting funds away from critical sectors such as health, education, and climate adaptation, hindering development.

Rising Borrowing Costs

• Interest rates for loans from official creditors doubled to over 4% in 2023, while private creditors charged 6%, the highest in 15 years.
• Such increased borrowing costs have deepened the financial burden on developing nations, further complicating their debt repayments.

Role of Creditors

• Private creditors reduced their lending to IDA-eligible countries, leading to USD 13 billion more paid in debt servicing than new loans received.
• Multilateral institutions like the World Bank provided USD 51 billion more in loans than they collected in repayments, offering critical support.

Impact on IDA-Eligible Countries

• IDA nations faced extreme financial strain in 2023, paying USD 96.2 billion in total debt servicing, including a record-high USD 34.6 billion in interest costs, four times the amount in 2014.
• Nearly 6% of their export earnings went to interest payments, with some countries allocating up to 38%.

Global Debt Crisis: UNCTAD Report Highlights

Sharp Rise in Global Public Debt

• Global debt is projected to reach USD 315 trillion in 2024, which is three times the global GDP.
• Public debt in developing nations, now at USD 29 trillion, has grown twice as fast as in developed economies since 2010.

Impact on Development and Climate Initiatives

• About 50% of developing nations allocate 8% or more of their government revenues to debt servicing, twice the proportion from a decade ago.
• These countries now spend a higher share of GDP on debt servicing (2.4%) compared to climate initiatives (2.1%), limiting their ability to address climate change.

Declining Development Assistance

• Official Development Assistance (ODA) in the form of grants is shrinking, while loans now constitute 34% of aid, up from 28% in 2012.
• Debt relief funding has fallen from USD 4.1 billion in 2012 to USD 300 million in 2022, worsening debt management for poor nations.

Global Debt: Definitions and Types

1. Public Debt: Debt owed by governments to domestic or foreign creditors, often financed through bonds, treasury bills, or international loans.
2. Private Debt: Borrowings by businesses and individuals, including mortgages, corporate loans, and credit card debts.

Measures to Address the Debt Crisis

Debt Management and Financial Analysis System (DMFAS)

• UNCTAD’s DMFAS program helps developing countries improve their debt recording, risk analysis, and negotiation skills.

Heavily Indebted Poor Countries (HIPC) Initiative

• Launched by the IMF and World Bank in 1996, this initiative provides debt relief to the poorest nations meeting specific criteria, such as creating a Poverty Reduction Strategy Paper (PRSP).
• For instance, Somalia saved USD 4.5 billion in debt servicing after completing the program in 2023.

Global Sovereign Debt Roundtable (GSDR)

• Co-chaired by the IMF, World Bank, and G20, the GSDR promotes collaboration among debtor nations and creditors to address debt restructuring challenges.

Strengthening Debt Relief Frameworks

• The G20 Common Framework for Debt Treatment, launched in 2020, offers coordinated support to low-income countries dealing with unsustainable debt levels.

Way Forward

• Inclusive Decision-Making: Low-income nations must have a stronger voice in international financial decisions. Transparency in debt data and accountability mechanisms are essential.
• Contingency Financing: Institutions like the IMF should expand access to emergency funds, such as Special Drawing Rights (SDRs), to help countries stabilize during crises.
• Sustainable Financing: Multilateral Development Banks (MDBs) should focus more on funding long-term projects aligned with Sustainable Development Goals (SDGs).
• Debt Restructuring Flexibility: Existing frameworks need automatic provisions for debt payment suspensions during economic downturns to provide relief and stabilize economies.

Conclusion

The rising debt levels and servicing costs highlighted in the International Debt Report 2024 emphasize the need for coordinated global action. Developing nations face mounting challenges in balancing debt repayment with essential investments in health, education, and climate initiatives. Strengthening multilateral cooperation and ensuring transparency in debt practices are critical for sustainable economic growth and resilience in these economies.