How to Ease Rising External Debt-Service Pressures in Low-Income Countries

IMF Blog, January 24, 2024

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Debt servicing costs are increasing rapidly while annual refinancing needs have tripled to about $60 billion.
The share of revenues going to pay foreign creditors is generally about two and a half times higher than a decade earlier.
For a typical low-income borrower the share has risen to about 14 percent, from about 6 percent.
In some economies the share has risen as much as 25 percent, from about 9 percent.
Low-income countries need to refinance about $60 billion of external debt each year, about three times the average in the decade through 2020.
Private creditors accounted for about one third of financing in the last decade compared with about one fifth in the previous decade.
The typical Sub-Saharan African country raised only 13 percent of gross domestic product in revenues in 2022, compared with 18 percent in other emerging economies and developing countries and 27 percent in advanced economies.

Higher government borrowing and deficits to mitigate the impact of the pandemic and other external economic shocks increased debt levels and the cost of servicing them.
Central banks significantly raised borrowing costs to tame inflation, making it costlier to raise new debt or refinance existing debt; uncertainty about when rates will be cut contributes to volatile market conditions.
A shift toward greater private-sector borrowing (about one third vs about one fifth) increased financing costs and vulnerability to global financial shocks, reflecting earlier slowdowns in financing from multilateral development banks (MDBs) and official development assistance (ODA) agencies over 2020-22.

Higher interest payments and accelerated repayment schedules strain budgets and crowd out spending on essential services, investment, job creation, prosperity, and climate resilience.
There is a significant risk of a liquidity crunch—failure to raise sufficient financing at an affordable cost—which could lead to a destabilizing debt crisis.
Countries with high debt vulnerabilities face imminent pressure and cannot afford to delay reforms.

Some countries have implemented reforms to create fiscal space:
- Angola, The Gambia, Nigeria, and Zambia have taken steps to implement significant energy subsidy reforms to create space for development spending.
Many countries lag in revenue-raising measures such as broadening the tax base, reducing tax exemptions, and increasing tax administration efficiency.

Accelerate policy reforms to boost growth and capture more revenue from that growth, including tax reforms; these reforms directly improve key debt metrics.
Mobilize lower-cost funding, in particular grants, to support immediate financing needs while reforms take effect.
Consider IMF engagement to help bridge financing gaps and strengthen policy frameworks.
Encourage MDBs and ODA providers to extend financing, especially to support reforms addressing global challenges such as climate.
Continue efforts to ensure the IMF has sufficient resources and to scale-up MDB support.
Protect ODA budgets to ensure the least fortunate can participate more fully in the global economy.

Low-income countries can seek debt relief through the Group of Twenty’s Common Framework, which has been used to reduce debt levels (with the exception of the debt standstill agreed for Ethiopia) but was also intended to provide temporary liquidity relief.
To serve as effective temporary liquidity relief, the Common Framework would require greater predictability and speed.
Progress has been made: the agreement on a debt treatment by official creditors for Ghana took less than half the time it took for Chad two years earlier.
Continued engagement on technical issues— including through the Global Sovereign Debt Roundtable (established last year by the IMF, World Bank and G20)—is important.
Some analysts are questioning whether more systemic approaches to reprofiling or refinancing debt will be necessary if country-driven actions and scaled-up multilateral support prove insufficient.

Possible scenario: sufficient low-cost funding materializes, allowing countries to manage refinancing and reform.
Alternative scenario(s): more ambitious domestic reforms, stronger international cooperation, and faster improvements in the global debt restructuring architecture will be necessary to avoid a destabilizing debt crisis.
The funding squeeze facing low-income countries must be closely monitored.

Allison Holland, Ceyla Pazarbasioglu; January 24, 2024.