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Debt in low-income countries: growing vulnerability

Download the January 2019 Global Economic Outlook Report.

Since 2013, the median public debt of low-income countries has increased by 20 percentage points of GDP and increasingly comes from non-concessional and private sources. As a result, interest payments are absorbing an increasing share of public revenue in these countries.

This increase in public debt exposes low-income countries to increased currency, interest rate and refinancing risks. Currently, 11 low-income economies are over-indebted or at high risk of debt distress, up from six in 2015. Even low-income countries at low or moderate risk of debt distress face erosion of safety margins. .

To protect themselves from the risks associated with high debt, low-income countries urgently need to strengthen the effectiveness of domestic resource mobilization, public investment and other spending, as well as debt management.

Debt relief under the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative (MDRI) have helped reduce the public debt of low-income countries by a Median debt-to-GDP ratio from nearly 100 percent in the early 2000s to a median of just over 30 percent in 2013. This downward trend subsequently reversed sharply, with the median debt ratio rising to over 50% in 2017. The rise was particularly marked for commodity exporters.

Increased debt raises less concern about debt sustainability if it is used to finance investments that increase countries’ potential output, and therefore their ability to repay loans in the future. In some low-income countries, larger budget deficits have been offset by increased public investment. For most low-income countries, however, a substantial portion of borrowing has been used to finance an increase in current consumption.

Gross public debt of low-income countries (LICs)

Increasingly, the public debt of low-income countries comes from commercial creditors and non-Paris Club creditors. These loans are more likely to be made at market rates than at concessional rates. As a result, interest payments have absorbed an increasing share of government revenue, and some low-income countries are becoming susceptible to sudden increases in borrowing costs, especially when they have significant refinancing needs in the years to come. come or have borrowed in foreign currency.

Evolution of the composition of creditors of public and government guaranteed external debt, 2007-2016

Low-income countries need to mobilize domestic resources, increase the efficiency of public spending and improve debt management practices, with an emphasis on better data collection. These reforms can reduce the possibility of costly defaults, improve debt transparency, support sustainable financial sector development, and reduce economic volatility. Despite some improvement, debt management capacity in many low-income countries is weak. Recent examples of hidden debt and discrepancies in debt statistics indicate poor debt recording capacity, weak legal frameworks, and governance issues.

Tags : debt relief
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