Global public debt surges, driven by cascading crises

Pubic debt. Image colected.

Penang, 6 Jun (Kanaga Raja) — Global public debt, comprising domestic and external general government debt, reached an alarming US$97 trillion in 2023, a US$5.6 trillion increase from 2022, according to UN Trade and Development (formerly known as UNCTAD).

In the 2024 edition of its report, titled “A World of Debt: A Growing Burden to Global Prosperity”, UN Trade and Development pointed to the alarming surge in global public debt, driven by cascading crises, as well as the sluggish and uneven performance of the global economy.

It said the growing debt burden disproportionately impacts developing countries, as servicing it diverts essential resources away from their development aspirations.

“Recent events have worsened this challenge. The rise in global interest rates since 2022 further strained public budgets in developing countries.”

High interest payments are outpacing the growth in essential public expenditures such as health, education, and climate action, said the report.

In the developing world, home to 3.3 billion people, one out of every three countries spends more on interest payments than on these critical areas for human development, it added.

It said the global financial architecture is no longer capable of meeting the needs of the world in the twenty-first century, adding that this is a substantial challenge to sustainable development.

“Developing countries must not be forced to choose between servicing their debt or serving their people. The international financial architecture must change to ensure a prosperous future for both people and the planet.”

RISING PUBLIC DEBT

According to the UNCTAD report, in 2023, public debt, comprising domestic and external general government debt, reached US$97 trillion, a US$5.6 trillion increase from 2022.

This growth is marked by significant regional disparities, it said, adding that public debt in developing countries is rising at twice the rate of that in developed countries.

In 2023, public debt in developing countries reached US$29 trillion, accounting for 30% of the global total.

This is a substantial increase from a 16% share in 2010 and reflects the rapid growth of public debt in developing countries, said the report.

Highlighting the stark contrast among the developing regions, the report said that over three-quarters of this debt is owed by countries in Asia and Oceania, while Latin America and the Caribbean accounts for 17% and Africa for just 7%.

The burden of this debt varies significantly with countries’ ability to repay it and is exacerbated by the inequality embedded in the international financial architecture: Those least able to afford it end up paying the most, it said.

Examining the evolution of public debt relative to the size of developing economies, the report found that in over half of these countries, public debt has declined relative to GDP.

The median value of the public debt-to-GDP ratio fell from a peak of 60.4% in 2020 to 54.7% in 2023, it said.

It said that this decline is due to high global inflation, which increases nominal GDP, and stronger-than-expected real GDP growth in middle-income countries in Asia and Oceania, and to a lesser extent, in Latin America and the Caribbean.

Consequently, the report said even though the stock of public debt increased also in these regions, the median debt-to-GDP ratios have decreased.

In contrast, economic performance in Africa has faltered due to global shocks, resulting in a heavier debt burden.

The report said that the median public debt-to-GDP ratio has continued to increase, reaching 61.9% in 2023. As a result, an increasing number of developing countries with high debt-to-GDP levels are concentrated in Africa.

“The region’s share of countries with debt-to-GDP ratios above 60% has increased from 25% to 46% between 2013 and 2023.”

SOUTH’S DEBT BURDEN

Developing countries are grappling with an international financial architecture, whose entrenched asymmetries exacerbate the impact of cascading crises on sustainable development, said UN Trade and Development.

This system intensifies their debt burden by limiting access to affordable development finance and pushing them to borrow from more volatile and expensive external sources, it added.

The report said that the limited size of domestic financial markets and higher levels of external public debt make them more vulnerable to external shocks and financial instability.

For example, it said when global financial conditions change or international investors become more risk-averse, borrowing costs can suddenly spike.

Additionally, if a country’s currency devalues, debt payments in foreign currency can soar, leaving less money for development spending.

Consequently, developing countries are forced to increase the transfer of resources to their external creditors, while resolving debt crises becomes more difficult, said the report.

It noted that developing countries’ external public debt reached US$3.2 trillion in 2022, and that for half of these countries, external public debt was at least as high as 28.4% of GDP and 92.4% of their exports.

Both indicators show improvements since 2020, marginally in the case of GDP and substantially in the case of exports, said the report.

It said the main driver of the decline in the external public debt-to-export ratio is the evolution of exports, which experienced a sharp slump during the pandemic followed by a strong recovery amid high commodity prices in 2022.

Despite the improvement of these indicators, external public debt service requirements remain high, reaching US$365 billion in 2022.

Of particular concern is the evolution of the external debt service-to-government revenue ratio, said the report.

It noted that governments are now allocating twice as much resources towards servicing this debt relative to revenues compared to 2011, leaving a declining share of resources for investments in sustainable development.

Furthermore, half of developing countries are allocating at least 6.3% of their export revenues to external public debt service, it said.

For comparison, the 1953 London Agreement on Germany’s war debt limited the amount of export revenues that could be spent on external debt servicing (public and private) to 5% to avoid undermining the recovery, said the report.

“The growing burden of debt on development is a consequence of the evolution of debt financing over the last decade.”

Governments in developing countries borrow from various sources, including bilateral (other governments), multilateral (such as multilateral development banks) and private creditors (including bondholders, banks, and other lenders), said UN Trade and Development.

Since 2010, the portion of external public debt owed to private creditors has risen across all regions, accounting for 61% of developing countries’ total external public debt in 2022.

The report outlined three main challenges associated with the rising reliance on private creditors.

Firstly, it said the increasing complexity of the creditor base makes debt restructuring more difficult as it requires negotiating with a broader range of creditors with diverging interests and legal frameworks.

“Delays and uncertainties increase the cost of resolving debt crises. The relationship between restructuring costs and time required for completion is highly relevant in the current context.”

The report said that debt restructurings since 2020 are taking longer to finalise compared to episodes in previous decades, underscoring the need for improved debt crisis resolution mechanisms.

Secondly, lending by private creditors is volatile and prone to rapid shifts, especially during crises, as investors pull back in a “flight to safety”. This can lead to a resource outflow when countries can least afford it.

In 2022, developing countries paid US$49 billion more to their external creditors than they received in fresh disbursements, resulting in a negative net resource transfer, said the report.

The net resource transfer varied significantly by creditor type, illustrating the complexity of the current creditor base, it noted.

In 2022, bilateral and multilateral creditors provided a total of US$40 billion in positive transfers, while private creditors withdrew a record US$89 billion from developing countries.

The report said a total of 52 countries experienced net outflows of resources in 2022, up from 32 in 2010, with most of the affected countries being in Africa and Asia and Oceania.

The growth in the number of countries experiencing resource transfer highlights the widespread nature of the problem, exacerbated by rising borrowing costs, it added.

Thirdly, borrowing from private sources on commercial terms is more expensive than concessional financing from multilateral and bilateral sources.

The inequalities embedded in the international financial architecture exacerbate these differences in the cost of financing, said UN Trade and Development.

It also said that the borrowing costs of developing countries far exceed those of developed countries.

Developing regions borrow at rates that are 2 to 4 times higher than those of the United States and 6 to 12 times higher than those of Germany.

High borrowing costs increase the resources needed to pay creditors, which makes it difficult for developing countries to finance investments, said the report.

PEOPLE PAYING THE PRICE

The increase in interest rates by central banks worldwide since 2022 is having a direct impact on public budgets in developing countries, said UN Trade and Development.

Net interest payments on public debt reached US$847 billion in 2023, a 26% increase compared to 2021.

The report said currently, more than half of developing countries allocate at least 8% of government revenues to interest payments, a figure that has doubled over the past decade.

“The rising pressure of interest payments is substantial across regions, particularly in Africa and Latin America and the Caribbean.”

In 2023, a record 54 developing countries, equivalent to 38% of the total, allocated 10% or more of government revenues to interest payments, with nearly half of them in Africa.

The report said developing countries’ interest payments are not only growing fast, they are outpacing growth in critical public expenditures such as health and education.

The rapid increase in interest payments is constraining spending across developing countries, it added.

For example, during the initial years of the COVID-19 pandemic, Africa and Asia and Oceania (excluding China) spent more on interest payments than on health.

For the 2020-2022 period, public per capita health expenditures in these regions were only US$39 and US$62, respectively, while per capita expenditure to repay public debt interests reached US$70 and US$84, respectively.

The number of countries where interest payments surpass spending in these essential categories is rising. During the years 2020-2022, there were 15 countries whose interest payments exceeded education expenditures, and 46 countries where they were higher than health expenditures.

A total of 3.3 billion people live in countries that spend more on interest payments than on either education or health, the report said, adding that this situation is untenable and must change.

The report also found that the negative impact on developing countries from resource transfers to creditors has been exacerbated by three shifts in Official Development Assistance (ODA):

1. Aid to developing countries has declined for two consecutive years, dropping to US$164 billion in 2022.

2. A growing share of aid is now provided through concessional loans rather than grants. The share of loans in aid for developing countries increased from 28% in 2012 to 34% in 2022.

3. Resources allocated to actions related to debt, including debt relief, swaps, restructuring and others, have hit a historical low, falling from US$4.1 billion in 2012 to only US$300 million in 2022.

The decline in overall aid, the increasing use of loans, and the sharp reduction in debt relief resources add further pressure on developing countries burdened by debt, said the report.

A CALL FOR ACTION

The challenges posed by debt to sustainable development are at the forefront of ongoing multilateral discussions, the report noted.

At the most recent United Nations General Assembly, 149 countries addressed issues related to financing for development or debt. Specifically, 73 countries highlighted the various ways in which debt is intertwined with sustainable development.

The call for reforming the international financial architecture is loud, with nearly 50 world leaders calling for efforts towards this common goal, the report said.

To address the global debt challenges and achieve sustainable development, the United Nations, in the SDG Stimulus package and the Summit of the Future’s policy brief on the Reforms to the International Financial Architecture, outlines a clear way forward, it added.

According to UN Trade and Development, this includes:

* Make the system more inclusive, improving the real and effective participation of developing countries in the governance of the international financial architecture.

* Tackling the high cost of debt and rising risk of debt distress and create an effective debt workout mechanism to address the slow progress of the G20 Common Framework for Debt Treatment due to limited country eligibility, creditor coordination challenges and the lack of automatic debt service suspension clauses to participating countries.

* Provide greater liquidity in times of crisis, expanding contingency finance so that countries are not forced into debt as a last resort, including through the strengthened use of Special Drawing Rights, a temporary suspension of IMF surcharges, and increased quota-access windows to IMF emergency financing.

* More and better finance, massively scaling up affordable long-term financing. The transformation and expansion of Multilateral Development Banks to support long-term sustainable development and scaling up private resources. More concessional finance; fulfilling aid and climate finance commitments. – Third World Network