The pandemic sunk poor countries into record levels of debt. Rising interest rates, slow economic recoveries, and Russia’s Ukraine invasion may throw them into default.
Even before the war, more than half of the world’s poorest countries were in debt distress or close to it, said Marcello Estevão, the World Bank’s global director for macroeconomics, trade, and investments. Now, those same countries are having to deal with the rising costs of wheat and oil, in addition to interest rate increases, which are making debt interest payments more expensive.
The World Bank looks at the bond payments each country has due and compares those expenses to the country’s reserves and fiscal deficit to judge how much leeway the country has to pay back its debts. Over the next year, it expects a dozen or so countries to go into default, it said in a recent blog post.
The cost of borrowing is already going up across Africa, and in Sri Lanka, officials are considering a program with the IMF to ease the country’s debt burden
How should the world manage a debt crisis?
A debt crisis today would likely be smaller in size than in the past. More than two dozen countries were involved in the Latin American debt crisis in the 1980s, and in the mid-1990s, there were more than 30 countries with unsustainable debt levels, leading to the creation of the Heavily Indebted Poor Countries Initiative.
Unlike previous crises, however, the countries in distress hold more debt with private versus government creditors. This makes it more difficult for a country to restructure its debts. “If you have more exposure to more creditors—particularly small creditors—then it’s much harder to get everyone around the table to do the debt restructuring,” Estevão said.
To stave off a crisis, he added, rich countries should step in now, streamlining the debt restructuring process to deal with defaults more quickly and with more leniency than in the past.