Developing nations may need to find as much as $2.5 trillion over five years to meet external debt-service costs as interest rates rise and poorer countries struggle to refinance borrowings, a Finance for Development Lab model shows.
The findings published by the Bill & Melinda Gates Foundation-backed and Paris-based think tank assume interest rates climbing by 400 basis points from levels in 2019 and a 10% decline in currencies against the dollar. It assessed conditions in 113 countries, with China and Russia among nations excluded because data weren’t available.
“Current costs of funding make debt service hard to sustain, with an expected peak in 2024-25,” according to the authors of a paper based on the model titled ‘The Coming Debt Crisis’. “If such conditions were to hold, a significant liquidity crisis would quickly turn into a widespread solvency crisis.”
Developing nations, with weaker sources of revenue, have borne the brunt of surging interest rates and increased borrowing, a result of shocks including the Covid 19 pandemic and Russia’s invasion of Ukraine, which has driven up world food and energy prices. A greater proportion of poorer-country debt is now owed to commercial lenders, which offer shorter maturities, and capital markets have largely closed to many governments.
Total debt stock for those nations is expected to surge to $4.3 trillion in 2026 from $2.9 trillion last year and $2 trillion in 2016, said Charles Albinet and Martin Kessler, the authors of the paper.
Under the scenario, 35 countries would cross what they said were “debt-service risk thresholds,” compared with 22 currently, and the number in sub-Saharan Africa would jump to 18 from 10.
Lower-middle income, a category that includes nations ranging from Ghana to El Salvador, would see their median debt-service-to-revenue ratio rise to 15% from 10% in 2020, an amount that for some nations would exceed their health and education budgets
Credit: Mark-Anthony Johnson