Since 2013, median government debt in low-income countries has risen by 20 percentage points of GDP and increasingly comes from non-concessional and private sources. As a result, interest payments are absorbing an increasing proportion of government revenues in these countries.
This increase in public debt exposes low-income countries to greater currency, interest rate, and refinancing risks. At present 11 low-income economies are in debt distress or at a high risk of debt distress, up from six in 2015. Even those low-income countries that are at low or moderate risk of debt distress face eroding safety margins.
To shield themselves from the risks associated with high debt, low-income countries urgently need to strengthen the effectiveness of domestic resource mobilization, public investment and other spending, and debt management.
Debt relief under the Heavily Indebted Poor Countries initiative and the Multilateral Debt Relief Initiative (MDRI) helped to reduce public debt among low-income countries from a median debt-to-GDP ratio of close to 100 percent in the early 2000s to a median of just over 30 percent in 2013. This downward trend reversed sharply thereafter, with the median debt ratio rising to above 50 percent by 2017. The rise was especially sharp for commodity exporters.
Rising debt raises fewer concerns about debt sustainability if it is used to finance investment that raises countries’ potential output, and therefore their ability to repay loans in the future. In some low-income countries, wider fiscal deficits were matched by higher public investment. For most low-income countries, however, a substantial part of the borrowing has been used to finance a rise in current consumption.
Increasingly, low-income country public debt comes from commercial creditors and non-Paris Club creditors. These loans are more likely to be made at market rather than concessional rates. As a result, interest payments have absorbed a growing share of government revenues, and some low-income countries are becoming susceptible to a sudden increase in borrowing costs, especially when they have substantial refinancing needs in coming years or have borrowed in foreign currencies.
Low-income countries need to mobilize domestic resources, increase the efficiency of public expenditures, and improve debt management practices, with a focus on better data collection. These reforms can reduce the possibility of costly defaults, enhance debt transparency, support sustainable financial sector development, and reduce economic volatility. Despite some improvement, debt management capacity in many low-income countries is low. Recent examples of hidden debt and discrepancies in debt statistics point to continued low debt recording capacity, weak legal frameworks, and governance challenges.