This is the first in an ODI series of blogs, briefing papers and reports examining whether a new debt or financial crisis is brewing that could threaten the Sustainable Development Goals – and what should be done to prevent it. In this edition, I’ll be focusing on the public (or sovereign) debt situation in low-income countries.
Three worrying trends dominate the public debt picture for low-income developing countries: debt is rising; it has become more expensive; and the proportion of countries that are vulnerable to a damaging debt crisis is high and rising.
Trend 1: A rise in debt since 2013
According to the IMF, the median public debt of low-income developing countries rose to 47% of GDP in 2017, up from 33% in 2013. Only eight countries in this group did not see an increase during this period. This increased borrowing comes from both home and abroad, with both external and domestic debt on the rise.
Borrowing, if used wisely, can make a major contribution to sustainable economic development. This level of debt may seem relatively small compared to high-income countries, whose public debt rocketed in response to the global financial crisis, and also to low-income country levels during the first decade of this century before debt relief initiatives kicked in. However, the relative size is not the only element that will tell you whether a particular debt level is worrying.
Trend 2: Debt has become more expensive
The rise in debt levels has been accompanied by a shift in the cost of the debt, which has become much more expensive. Taken together, these trends equal a big warning sign. More expensive debt means that governments have to spend more of their revenues repaying it. This means less for other priorities like health, education, or infrastructure. It also leads to an increased probability that debt will increase, as borrowing may be needed to plug holes in expenditure caused by the diversion of revenues to repay debt.
One analysis, using IMF and World Bank data, estimates that the amount governments are paying to service debts has almost doubled in recent years, taking up more than 12% of government revenue in 2018, compared to under 7% in 2010. Given that low-income countries struggle to raise tax revenue – tax as a share of GDP is significantly lower than for other categories of country – this large share of revenue taken up by debt servicing is a big problem.
Debt has become more expensive in low-income countries because of changes in who the money is borrowed from, as the graph shows.
