Many low-income countries are trapped in a debt doom loop, paying sky-high interest rates to private creditors. This is depriving them of the monetary resources they need to invest in education, health care and infrastructure that can help secure future growth. The global apparatus for assessing debt sustainability needs to be upgraded. We need to ensure that it is not too quick to decide that countries merely need loans to tide them over, when most are insolvent and will require debt write-offs. We also need to stop encouraging domestic creditor-driven lending practices that strangle domestic private-sector initiative and erode the capacity of economies to resist financial shocks.
In the 2020s, high interest rates and a slumping world economy exacerbated the fragility of many low-income country debts. A series of crises since then, from the COVID-19 pandemic to rising trade tariffs, have pushed their repayment costs even higher. The international system has tried to address these problems through rescheduling and limited debt relief, but private lenders, often with deep links to governments, are not always willing to comply. Global taxpayers, therefore, end up footing the bill for predatory private lending practices.
Today’s crowded creditor landscape features not only the traditional mix of multilateral and bilateral creditors but also major emerging powers such as China and India, as well as petrostates. This makes coordination and overcoming deadlocks difficult, especially in the context of rising tensions over multilateral institutions and democracy. Meanwhile, the rapid rise in interest payments is limiting the budgets of developing countries and restricting their ability to take action on climate change. This is a debt crisis of a scale never before seen.