In News:

Recently released, World Bank’s "International Debt Report 2024" highlights a worsening debt crisis for developing nations, with 2023 marking the highest debt servicing levels in two decades, driven by rising interest rates and economic challenges.

Key Highlights:

Rising Debt Levels:

• Total external debt of low- and middle-income countries (LMICs) reached $8.8 trillion by the end of 2023, an 8% increase since 2020.
• For IDA-eligible countries (those receiving concessional loans from the World Bank), external debt rose by 18%, reaching $1.1 trillion.

Debt Servicing Costs:

• Developing nations paid a record $1.4 trillion in debt servicing costs (principal and interest) in 2023.
• Interest payments surged by 33%, totaling $406 billion, putting immense pressure on national budgets, especially in critical sectors like health, education, and environmental sustainability.

Interest Rate Increases:

• Interest rates on loans from official creditors doubled to 4% in 2023.
• Rates from private creditors rose to 6%, the highest in 15 years, exacerbating the financial burden on developing countries.

Impact on IDA-Eligible Countries:

• IDA countries faced severe financial strain, paying $96.2 billion in debt servicing, including $34.6 billion in record-high interest costs (four times higher than a decade ago).
• On average, 6% of their export earnings were allocated to debt payments, with some countries dedicating up to 38%.

Role of Creditors:

• Private creditors reduced lending, leading to more debt-servicing payments than new loans.
• In contrast, multilateral lenders like the World Bank provided additional support, with the World Bank contributing $28.1 billion.
• Multilateral institutions have emerged as crucial support systems, becoming "lenders of last resort" for poor economies.

Debt Data Transparency:

• Efforts to improve debt transparency led to nearly 70% of IDA-eligible economies publishing accessible public-debt data in 2023, a 20-point increase since 2020.
• Accurate debt data can reduce corruption and promote sustainable investment.

Global Financial Reforms:

• There is a growing call for global financial reforms to address the systemic challenges of developing nations facing rising debt burdens.
• Proposed measures include increased concessional financing, improved restructuring mechanisms, and the establishment of a Global Debt Authority for better debt management.

Impact on Climate and Development Goals:

• Debt servicing has become a larger financial burden than climate initiatives in many countries, with developing nations spending more on debt servicing than climate goals (2.4% of GDP vs. 2.1% for climate investments).
• To meet climate commitments under the Paris Agreement, climate investments would need to rise to 6.9% of GDP by 2030.

Debt Relief Initiatives:

• Programs like the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI) provide debt relief to the world’s poorest nations, helping them meet Sustainable Development Goals (SDGs).
• For instance, Somalia saved $4.5 billion in debt service after completing the HIPC program in December 2023.

Global Sovereign Debt Roundtable (GSDR):

• The GSDR brings together debtor nations and creditors (both official and private) to improve debt sustainability and address restructuring challenges.
• Co-chaired by the IMF, World Bank, and G20, the forum aims to find coordinated solutions for sovereign debt issues.