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High interest rates paid by poorer nations spark fears of global debt crisis

<span>Photograph: Anadolu Agency/Getty Images</span>
Photograph: Anadolu Agency/Getty Images

Fears of a deepening global debt crisis have been highlighted by research showing that low-income countries are paying rocketing interest on their foreign borrowing.

Analysis by the campaign group Debt Justice found that, while interest rates have been rising for rich and poor countries since the start of 2022, increases have been particularly severe for some of the most vulnerable poorer nations.

With debt relief set to be high on the agenda at the annual meeting of the World Bank, which begins on 10 October, Debt Justice said interest rates had risen by an average of 5.7 percentage points for low income countries compared with a 2 point increase in the US.

Many of the 27 countries that provided data faced much higher than average interest rates, led by war-ravaged Ukraine, which has seen the cost of its new borrowing rise from 10.2% to 46% since the start of 2022.

Ethiopia and Zambia have both seen 25-point increases in their debt servicing costs, as measured by the yield – or interest rate – on their foreign currency bonds. Interest rates for two-thirds of the countries studied are now above 10%, intensifying debt problems and making it almost impossible for them to borrow from private lenders, the campaign group said.

Heidi Chow, executive director of Debt Justice, said: “Many countries were already cutting essential spending to cope with the debt crisis, before rising interest rates made an alarming situation even worse.

“Countries like Pakistan are also facing colossal costs from widespread devastation caused by the climate emergency. We urgently need mechanisms to quickly cancel debts for countries in need, especially high interest loans from private lenders.”

Of the 27 lower income governments with public information available on their foreign currency bonds, Debt Justice found nine had yields over 20%: El Salvador, Ethiopia, Ghana, Maldives, Pakistan, Sri Lanka, Tunisia, Ukraine and Zambia. A further 10 had yields between 10% and 20%: Angola, Cameroon, Egypt, Honduras, Kenya, Mongolia, Nigeria, Papua New Guinea, Rwanda and Tajikistan.

In addition to the rise in borrowing costs, the study found that debt repayments were also being made more expensive by a rising US dollar, which had appreciated by an average of 14% against the 27 low income countries. External debt tends to be owed in foreign currencies – especially the dollar.

Related: World Bank warns higher interest rates could trigger global recession

David Malpass, the World Bank president, said in a speech last week that debt relief would play a “key role” in alleviating the strains on the budgets of poor countries.

Malpass said that the new financial crisis that had followed Covid-19 “finds developing countries with eroded fiscal positions, including high debt and depressed budget revenues. Countries do not have enough fiscal buffers to provide support to key pro-growth and development spending.”