The International Debt Report 2024 by the World Bank highlights key trends in global debt, particularly for low- and middle-income countries. Read here to learn more.
One significant finding is the continued rise in external debt, with global economic vulnerabilities exacerbated by interest rate hikes and inflationary pressures.
The report provides a detailed analysis of debt stocks, flows, and sustainability concerns, emphasizing the growing burden of debt servicing costs due to increased borrowing costs.
For India, the report notes an increase in external debt by $31 billion, reaching $646.79 billion in 2023. This rise includes a significant growth in interest payments, which jumped from $15.08 billion in 2022 to $22.54 billion in 2023.
Long-term debt also increased by 7%, while short-term debt saw a slight decline. The debt servicing ratio as a percentage of exports rose to 10%, indicating heightened pressure on India’s balance of payments due to global financial conditions.
Key Findings of the International Debt Report 2024
- Rising Debt Levels
- Total External Debt: Low- and Middle-Income Countries (LMICs) reached a record high of USD 8.8 trillion by the end of 2023, an 8% increase since 2020.
- IDA-Eligible Countries: External debt rose by 18%, reaching USD 1.1 trillion.
- IDA’s Role: As a World Bank Group institution, IDA provides concessional loans and grants to the poorest nations with low creditworthiness.
- Rising Debt Servicing Costs
- Record Debt Servicing: LMICs spent USD 1.4 trillion in 2023 on principal and interest payments.
- Interest Payments Surge: Interest payments increased by 33%, reaching USD 406 billion.
- This diverted resources from essential sectors like health, education, and environmental sustainability, worsening development challenges.
- Rising Borrowing Costs
- Official Creditors: Interest rates doubled to over 4% on loans from official creditors in 2023.
- Private Creditors: Interest rates rose to 6%, the highest in 15 years.
- These rising borrowing costs placed a heavier financial burden on developing nations, further straining their capacity to service debts.
- Role of Private and Official Creditors
- Private Creditors: Reduced lending to IDA nations, leading to USD 13 billion more paid in debt servicing than new loans received.
- Multilateral Lenders: Institutions like the World Bank provided USD 51 billion more in loans than they collected in debt payments, offering crucial support during the crisis.
- Impact on IDA-Eligible Countries
- Severe Financial Strain: IDA-eligible countries paid USD 96.2 billion in debt servicing in 2023, with USD 34.6 billion in record-high interest costs.
- Export Earnings Impact:
- On average, nearly 6% of export earnings were allocated to interest payments.
- Some countries allocated up to 38% of export earnings to interest payments, exacerbating economic vulnerabilities.
Global debt
Global debt refers to the combined debt of governments, corporations, and households across the world.
It includes public debt (sovereign or government debt) and private debt (corporate and household debt).
Rising debt levels are a concern for economic stability, with implications for growth, inflation, and financial markets.
Key Components of Global Debt:
- Government Debt (Public Debt):
- Borrowing by governments to finance budget deficits.
- Issued through bonds or loans from international institutions.
- Major contributors: U.S., Japan, China, and EU countries.
- Corporate Debt:
- Borrowing by private companies to fund expansion, operations, or debt refinancing.
- Includes bonds, loans, and other credit instruments.
- Heavily concentrated in sectors like energy, technology, and manufacturing.
- Household Debt:
- Includes mortgages, personal loans, credit card debt, and student loans.
- High in developed economies such as the U.S., Canada, and some European countries.
Current Trends (2024):
- Total Debt Levels:
- As of 2024, global debt is estimated to be over $300 trillion, surpassing pre-pandemic levels.
- Debt-to-GDP ratio remains elevated, with concerns about its sustainability.
- Post-Pandemic Borrowing:
- Governments borrowed heavily during COVID-19 for stimulus measures.
- Corporate debt surged due to low interest rates, though rising rates now pose challenges.
- Rising Interest Rates:
- Central banks, including the U.S. Federal Reserve, ECB, and others, have raised interest rates to combat inflation.
- Higher borrowing costs increase debt servicing burdens, especially for emerging markets.
- Emerging Markets Under Pressure:
- Many developing countries face debt distress due to currency depreciation, rising interest rates, and high external debt.
- Examples include Sri Lanka, Zambia, and Argentina, which have sought IMF assistance.
Major Challenges:
- Debt Sustainability:
- High debt-to-GDP ratios can limit fiscal flexibility and investment in growth sectors.
- Risk of debt defaults in highly leveraged countries or corporations.
- Inflation and Monetary Policy:
- Inflationary pressures can erode real debt values but also necessitate tighter monetary policy, increasing borrowing costs.
- Geopolitical Risks:
- Conflicts (e.g., Russia-Ukraine), trade tensions, and supply chain disruptions exacerbate debt pressures.
- Climate Financing Needs:
- Global debt must also address the funding gap for climate change mitigation and adaptation.
Implications:
- Global Financial Stability: Excessive debt increases systemic risk and could trigger financial crises if defaults rise.
- Growth Constraints: Debt overhang can reduce investment, productivity, and economic growth potential.
- Policy Trade-offs: Governments must balance fiscal stimulus with debt sustainability, often leading to austerity or reforms.
Possible Solutions:
- Debt Restructuring: Rescheduling or reducing debt burdens through negotiations with creditors or international institutions.
- International Cooperation: G20 Debt Service Suspension Initiative (DSSI) and Common Framework for debt treatment.
- Sustainable Financing: Promoting green bonds, development finance, and reducing reliance on short-term debt.
UNCTAD World of Debt Report 2024
The UNCTAD (United Nations Conference on Trade and Development) World of Debt Report 2024 presents a concerning picture of the global debt landscape, highlighting rapid increases in public debt, regional disparities, and challenges in balancing debt servicing with climate action.
- Rapid Increase in Global Public Debt
- Projection: Global debt is set to reach USD 315 trillion in 2024, nearly three times the global GDP.
- Key Drivers:
- Pandemic Aftermath: COVID-19 led to unprecedented borrowing for healthcare, economic relief, and recovery.
- Rising Commodity Prices: Inflation in food and energy markets due to geopolitical tensions and supply chain disruptions.
- Climate Change Costs: Increasing expenses related to mitigation and adaptation efforts.
- Monetary Policy: Rising global interest rates, especially in advanced economies, have elevated debt servicing costs.
- Regional Disparities in Debt Growth
- Developing Countries:
- Public debt has surged to USD 29 trillion, now accounting for 30% of global debt, up from 16% in 2010.
- Debt in developing nations is growing twice as fast as in developed countries, underscoring vulnerabilities in emerging economies.
- Implications: These countries face higher risks of debt distress, with constrained fiscal space for social programs, infrastructure, and development.
- Debt Servicing vs. Climate Investments
- Debt Servicing Costs:
- 50% of developing countries allocate at least 8% of government revenues to debt servicing, a sharp increase over the past decade.
- Developing nations now spend 2.4% of GDP on debt servicing compared to 2.1% on climate initiatives.
- Climate Financing Gap:
- To meet the Paris Agreement targets, climate investment needs to rise to 6.9% of GDP by 2030.
- The current imbalance highlights the conflict between fiscal obligations and sustainable development goals (SDGs).
- Declining Official Development Assistance (ODA)
- Shift in Aid Composition: Loans now form 34% of ODA, up from 28% in 2012, exacerbating the debt burden on developing nations.
- Drop in Debt Relief Funding: Debt relief has plummeted from USD 4.1 billion in 2012 to just USD 300 million in 2022, further straining debt management efforts in vulnerable economies.
- Consequences: Reduced ODA undermines poverty alleviation, education, healthcare, and infrastructure development in low-income countries.
Broader Implications:
- Debt Sustainability Risks: Developing nations face an increased risk of default and economic instability.
- Global Inequality: Growing disparities in debt and development financing between developed and developing countries.
- Climate Action Setback: Limited fiscal space hampers investments in renewable energy, adaptation, and mitigation strategies.
Recommendations for Policy Action:
- Debt Restructuring and Relief: Expand international debt relief initiatives, including SDR (Special Drawing Rights) allocations and restructuring programs.
- Increased Climate Financing: Scale up grants and concessional financing to bridge the climate investment gap.
- Strengthening ODA: Revitalize commitments to ODA with a focus on grants over loans to reduce debt burdens.
- Multilateral Cooperation: Encourage coordinated global efforts to manage debt distress, particularly for vulnerable economies.
Conclusion
The 2024 International Debt Report highlights a deepening debt crisis in developing nations, driven by rising debt levels, higher servicing costs, and increased borrowing rates.
The financial strain has diverted resources from critical development sectors, underscoring the urgent need for global cooperation, debt restructuring, and enhanced concessional financing to ensure sustainable development.
Global debt is a complex and evolving challenge. While it has fueled economic growth and development, unsustainable debt levels pose risks to global financial stability. Coordinated efforts by governments, central banks, and international institutions are essential to managing and mitigating these risks.
Frequently Asked Questions (FAQs)
Q. How much debt the world is in 2024?
Ans: The world’s debt stock surged by over $12 trillion in the first three quarters of 2024 to a fresh record of nearly $323 trillion, thanks to falling borrowing costs and rising risk appetite, a report by a banking trade group showed.
Q. How do countries become debt-free?
Ans: Countries can achieve debt-free status through various means, including strong economic policies, high revenues from natural resources, disciplined government spending, and efficient tax collection systems.
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-Article by Swathi Satish
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