Developing countries face worst debt crisis in history, study shows

Developing countries are facing the worst debt crisis in history with almost half their budgets being spent on paying back their creditors, a study has found.

The report , by the campaign group Debt Relief International for Norwegian Church Aid, says more than 100 countries are struggling to service their debts, resulting in them cutting back on investment in health, education, social protection and climate change measures.

Debt service is absorbing 41.5% of budget revenues, 41.6% of spending, and 8.4% of GDP on average across 144 developing countries, according to the study.

It said that without urgent action problems would persist into the 2030s, and that pressures were greater than during both the Latin American debt crisis of 1982 and the debt crisis of the 1990s. The latter prompted relief under the Heavily Indebted Poor Country Initiative (HIPC).

In 2020 the G20 group of leading developed and developing countries launched the common framework, a scheme designed to speed up and simplify the debt relief process. However, progress has been much slower than hoped, reflecting the fact that much poor country debt is now owed to China and private bondholders.

The report said the common framework was falling “way short of expectations in terms of timeliness, participation by creditors, and the scale of relief provided”.

Countries would still be paying an average 48% of their budget revenue on service after relief and as a result few were applying to join the process.

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Among the suggestions made by the report are that debt relief should be:

• available to countries of all income levels and regions, and tailored to their needs
• provided in ways that reduces service to less than 15% of budget revenue
• provided rapidly and with immediate standstills of payments when a country applies for relief
• include all creditors
• provide legal protections for debtors against holdouts and lawsuits in all major financial centres

Matthew Martin, one of the report’s authors, called on the new government to legislate to prevent so-called vulture funds – funds that buy up debt cheaply and then seek to make a profit on it – from using the UK courts to sue poor countries.

“We now have the worst debt crisis in history, largely because more and more countries have gone to international bond markets and developed domestic bond markets to finance their development”, Martin said.

“There are three things the new UK government can do as priorities – pass a vulture fund law to push commercial creditors to provide debt relief; insist with the G20 that there be a fundamental independent review of the Common Framework to make it cancel debt service so governments can spend more on fighting climate change and inequality; and cancel debt service now for the Caribbean islands hit by Hurricane Beryl.”

Dagfinn Høybråten, the secretary general of Norwegian Church Aid, said: “A high debt burden is a huge drain on a country’s economy and hit the poorer parts of the population first through cuts in welfare, education, or health expenditure to pay debts.

“A debt crisis is paralysing and undermines all other development efforts. The 1982 crisis lasted over 20 years with much suffering before it was finally resolved in 2005. We do not have a generation to tackle this new debt crisis.”