World Bank: The debt of the poorest countries is becoming increasingly unsustainable

debt of the poorest countries is becoming more and more insolventthe situation is getting worse high interest rates and this is leading many small economies to disaster, warned this Wednesday The World Bank.

In his new annual report Regarding the fiscal situation in developing countries, the organization detailed that in 2022 these economies will devote 443 thousand 500 million dollars to pay off external debt (which they acquired from foreign companies), which forced them to cut costs in key sectors such as healthcare or education.

These are record numbers. The situation is even more desperate in the poorest countries that have access to a number of special World Bank resources, such as Pakistan, Tanzania or Ethiopia. These wasted $88.900 million to pay off debtof which more 23 billion was interest.

In sub-Saharan Africa the situation can be classified as “lost decade”explains EFE In an interview, the World Bank’s chief economist Indermit Jill.

This concept was often applied to Latin American countries in the 1980s, when the US Federal Reserve’s cycle of rate hikes led to many countries going bankrupt and The average per capita income of the region’s residents has stagnated.

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Something similar is happening now in sub-Saharan Africa, where the income of the average citizen has not increased during last ten years. “The question is what will happen in the next decade,” Gill asks.

Debt restructuring

The main problem that many of these countries face is that There is no fast enough mechanism for restructuring external debt.that is, changing the terms of payments and interest in order to be able to meet its obligations without going bankrupt.

This is one of the areas of greatest concern to development banks and international financial institutions such as the International Monetary Fund, which have already warned several times that if several of these countries went bankrupt at the same time, a crisis could spread to the global economy.

The main mechanism developed to solve these problems is known as The G20 “common framework” did not bring results provide at least one dollar of aid to countries that benefited from the program approved in 2020, but efforts to reform it have long stalled.

This situation has led to the fact that the main source of income in these countries has become multilateral banks, which aim to ensure the availability of resources for education, health care and the maintenance of minimum services. the economic growth requires much more investment.

Avoid disaster

The path to avoiding disaster is not easy, both in the case of poor countries, but also in middle-income countries such as Argentina, Brazil or Mexico– involves acceptance much more conservative fiscal policywhere the ratio of debt to gross domestic product (GDP) does not exceed 50%.

Gill acknowledges that the idea may seem somewhat idealistic, but insists that having the financial space to deal with future impacts is essential. the key to ensuring these economies don’t get trapped in an unstable cycle.

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This logic also applies to, for example, private investment – no company wants to invest in countries that are at risk of defaulting. combating climate change.

The economist argues that many of these countries should focus more on climate change adaptation than emissions reduction, because, on the one hand, they contribute much less to global warming than rich countries, and on the other, their infrastructure is much less prepared to deal with disasters. And this requires investment.