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As global interest rates have risen over the past 18 months, life has become more difficult for borrowers all over the world. Unfortunately, this includes the governments of the world's poorest countries. According to the non-governmental organisation, Debt Justice, which studied the financial situation of 91 low or lower middle income countries, their debt payments will this year hit the highest level for 25 years. These governments will need to spend 16.7 per cent of their revenues on external debt payments, up from just 7 per cent a decade ago.
That means less money will be available to provide essential services in countries where many people live in serious poverty. Part of the problem stems from more than a decade of exceptionally low global interest rates that began with the financial crisis of 2008. As developing country governments took advantage of the low borrowing costs, their debt levels steadily rose. This debt then surged further during the Covid-19 pandemic when governments battled to keep economies afloat.
Since the US Federal Reserve started raising interest rates last year the cost of borrowing has been surging for anyone borrowing in dollars, which includes most developing countries. The fallout has been particularly severe in parts of Africa and south Asia. Ghana and Sri Lanka have both defaulted on their debt over the past year.
What's the solution? The International Monetary Fund is stepping in, agreeing in June to provide a $3bn lifeline for Pakistan. In the same month the creditors of Zambia, led by the Chinese government, agreed to restructure $6.3bn of debt issued by the African nation. But a growing number of economists argue that far-reaching changes are needed to avoid a repeat of this crisis.
They include Barbadian official Avinash Persaud, whose influential Bridgetown agenda calls for much more support for lower income nations by multilateral financial institutions like the IMF, as well as far greater financial assistance from rich countries to cover the climate change related loss and damage suffered by poorer ones. These proposals have met an encouraging response from western politicians, including French President Emmanuel Macron. But while that debate continues, so too does the struggle of developing nations to service their debts.
