Facing substantial investment needs, developing countries must sustainably manage debt

With just over ten years until 2030, developing countries face important and complex challenges around the Sustainable Development Goals (SDGs).  Not least of which is how to finance the investments needed to achieve them. 

Estimates suggest that developing countries face a $2.5 trillion annual financing gap to meet the SDGs. Other studies conclude that the challenge of meeting this annual financing gap is substantial in low-income countries, which would require additional annual spending of 15.5 percentage points of GDP in 2030, focused relatively evenly on infrastructure and education and health. 

One way countries can make these increased investments is through debt financing. When used wisely, debt financing can help achieve sustained inclusive growth.   The International Development Association (IDA), the arm of the World Bank Group that works with the poorest countries, provides knowledge, convenes partners, and finances the projects and reforms that help low-income countries meet their development goals. We do this primarily through long-term concessional loans to countries, which charge zero or very low interest, as well as grants. IDA also helps countries better manage their debt, through support that builds institutional capacity and implements reforms for strengthened public financial management.  

At the recent World Bank Group and International Monetary Fund Spring Meetings, there was a lot of talk about debt. Attendees expressed concerns about developing country vulnerabilities to debt risks, examined ways to improve the monitoring and reporting of debt, discussed how countries can manage their debt levels more sustainably, and exchanged views about how creditor countries can support that effort. 

These concerns have increased with the recognition that many countries have seen their debt levels rise significantly in recent years. By some measures, we’ve reached a point where countries’ debt risk vulnerabilities need to be addressed with urgency. According to the joint World Bank-IMF Debt Sustainability Framework (DSF), half of the IDA countries covered by the DSF are assessed at high risk of external debt distress or in debt distress. 

Now, we know that countries acquire and build-up debt in different ways and for legitimate reasons, which reflect diverse policy and structural differences as well as investment strategies. Yet, the recent trends in the scale and composition of country-held debt is worth noting. Following a significant decline through 2013, public debt levels in IDA countries have increased substantially in recent years, with the median debt ratio rising to 49 percent of GDP by 2018. The composition of public debt has also shifted over the last decade, becoming increasingly non-concessional, especially in more-developed IDA countries. This has led to increases in debt service costs, which crowds out spending on development needs.   

These recent trends suggest that many IDA countries are carrying more—and more expensive—debt loads. When countries accumulate debt beyond sustainable levels, development outcomes are at stake.  Rising debt and debt vulnerabilities could potentially constrain access to finance, and with that also slow growth and future progress on the SDGs. Beyond this, the non-traditional, less-concessional sources of debt are often more complex and less transparent, making it difficult to fully assess a country’s debt risk profile and potentially making future debt distress more disruptive and harder to work through.  

Over the past year, the World Bank Group has been working in a coordinated effort with the International Monetary Fund to strengthen the overall support available to countries with high debt risk.  This joint approach focuses Bank Group and IMF efforts on: improving debt analytics and early warning systems to help countries better understand debt vulnerabilities; enhancing debt transparency to help countries have a more complete picture of their debt; strengthening capacity on debt/fiscal risk management to help countries deal with existing debt more effectively. In addition, the IMF and World Bank are reviewing their own debt policies with an eye toward improving their support to countries in monitoring and managing debt-related issues. 

We continue to promote the actions that IDA countries can take to better protect themselves from the risks associated with high debt. Such steps would include mobilizing greater domestic resources, which is crucial for creating fiscal space to finance priority spending while avoiding debt concerns. Only around half of IDA countries are above the 15 percent tax-to-GDP threshold, suggesting there is significant scope to increase public resources for development.  

Other important reforms include increasing the efficiency and selectivity of public spending and improving debt management practices with a focus on better data collection. Reforms such as these can reduce the possibility of costly defaults, enhance debt transparency, support sustainable financial sector development, and reduce economic volatility. Lowering vulnerability to debt risks will also hinge on sound macroeconomic policy frameworks and adoption of growth-enhancing reforms.  

We are also working with our partners to better coordinate our responses to this challenge. Together with the African Development Bank, we are bringing together policy makers and practitioners in Abidjan, Côte d’Ivoire, on May 16 to discuss how multilateral development banks like ours can better support countries in strengthening their public debt management to be more sustainable and transparent.  

These consultations will help guide IDA’s work going forward, as we work with our stakeholders to ensure that debt sustainability and transparency are incorporated as a cross-cutting topic in the next three-year IDA program and to determine how we can better utilize IDA’s tools to improve sustainable lending.

In this way, we will make sure that IDA support can continue to help countries better manage their debt and ensure that the financing needed to meet their development goals is available and sustainable to 2030 and beyond.