Low-income countries using over 10% of budgets to service debts
Restructuring needed to allow countries to tackle climate change and nature loss.
Increasing numbers of low-income countries are using more than 10% of their national budgets to service their debts and one – Angola – is using almost half, according to new analysis from IIED, released as the International Monetary Fund (IMF) convenes a roundtable meeting on debt.
Researchers analysed the available data for least developed Countries (LDCs) and found that at least 17 of them had seen the proportion of national budget being spent on servicing debts increase between 2015 and 2020. In the case of Senegal, it jumped from just over 7% to almost 35%. Ethiopia, Zambia, Tanzania, Guinea Bissau, Mozambique and Lesotho were all using more than 10% of their budgets on debt service payments with Angola spending a massive 46%.
The current picture is likely to be more acute as the COVID-19 pandemic and the war in Ukraine have increased costs and sent debts spiralling for many low-income countries in the last two years. Data was not available for 19 of the LDCs.
The issue of escalating debts for low-income countries has risen up the agenda over the last six months as Sri Lanka, Ghana and Zambia have all defaulted on sovereign debt. Today (3 April) the IMF will convene a sovereign debt roundtable to speed up its work on debt relief for countries in need. This will be followed by further meetings on the sidelines of the World Bank and IMF spring meetings in Washington that get under way a week later.
Sejal Patel, a senior researcher for IIED, said: “With the costs of servicing debt taking up a significant portion of their national budgets, and with health, education, transport and other essential services to pay for, it’s hardly surprising that the costs of adapting to and mitigating climate change and nature loss are out of reach for many low-income countries. And yet, in many cases, not only are they rich in nature and biodiversity, they are also on the front lines of climate change and particularly vulnerable to its impacts.
“Linking debt restructuring to climate and nature outcomes could alleviate the economic crisis, help conserve and restore nature, and protect the lives and livelihoods of millions of people who are already suffering the effects of global warming but have done the least to cause it.”
In the midst of the pandemic, the World Bank and IMF promoted a debt service suspension initiative (DSSI) to free up countries’ financial resources to combat and recover from COVID-19. That scheme has now ended. It only supported immediate relief on interest payments rather than the much-needed systematic initiatives to redesign debt financing to support post-COVID-19 recovery.
Notes to editors
The percentage of debt service to government budget was calculated using the following indicators:
- ‘Debt service on external debt, public and publicly guaranteed (PPG) (TDS, current US$)’ from the World Bank’s International Debt Statistics Database. Public and publicly guaranteed debt service is the sum of principal repayments and interest actually paid in currency, goods, or services on long-term obligations of public debtors and long-term private obligations guaranteed by a public entity. Data are in current US dollars.
- ‘Government Revenue, excluding grants (% of GDP)’ which is compiled from the IMF's Government Finance Statistics Yearbook and data files, and the World Bank and OECD’s GDP estimates. Government revenue is cash receipts from taxes, social contributions, and other revenues such as fines, fees, rent, and income from property or sales. Grants are also considered as revenue but are excluded in this indicator.
- ‘GDP (current US$)’, compiled from the World Bank and OECD national accounts data files. GDP at purchaser's prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current US dollars. Dollar figures for GDP are converted from domestic currencies using single year official exchange rates. For a few countries where the official exchange rate does not reflect the rate effectively applied to actual foreign exchange transactions, an alternative conversion factor is used.