Escalating debt challenges are inhibiting achievement of the SDGs
Cascading crises and a challenging global macroeconomic environment, characterized by tightening financial conditions, higher interest rates, US dollar appreciation, growth slowdown, and falling commodity prices, have made it harder for developing economies to service their debts and mobilise domestic resources for sustainable development.
In this context, debt challenges and related development crisis in the developing world have intensified. High debt costs are draining vital public resources needed for development. The number of economies where interest spending accounted for 10 per cent or more of public revenues increased from 29 in 2010 to 50 in 2022. At least 3.3 billion people live in economies that spend more on interest than on health and education -—
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—-. According to the joint IMF-World Bank Debt SustainabilityA country’s capacity to finance its policy objectives through debt instruments and service the ensuing debt -—
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—- for countries eligible for the Poverty Reduction and Growth Trust -—
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—-, as of February 2024, half of them (34 out of 68) were either at high risk or already in debt distress -—
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This chapter highlights the increasing tension between costly debt servicing and expenditure on the SDGsSustainable Development Goal. An ambitious and comprehensive multilateral response, as discussed ahead of the Summit of the Future, is essential to avoid a systemic debt crisis that is looming on the horizon for those 34 countries, which would deepen the existent development crisis, putting several developing economies further away from the 2030 Agenda. As such, actions on transforming multilateralism as well as how development is financed are set out in Bridgetown Covenant -—
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Table of contents
External debt stocks of developing economies more than doubled in a decade
The external debtExternal debt is understood as outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy -—
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—-. stocks of developing economies reached $11.4 trillion in 2023, more than double the value recorded a decade ago (figure 1). Since 2009, the total external debt stocks of developing economies has increased on average by 7.6 per cent per annum, similar to the average annual growth rate in the decade before the Global Financial Crisis (2000-2008). However, the pace of growth has markedly slow down after 2019 at 3.2 per cent per annum, three times less than the growth rate of 2009-2018 at 9.9 per cent per year. The total external debt stocks for developing economies excluding China, reached $8.9 trillion in 2023, representing an increase of 2.7 per cent compared to 2022. In 2022, developing economies, when possible refrained from borrowing externally as interest rates increased and preferred to pay back part of their debt.
Figure 1. Total external debt of developing economies continues to riseSource: UNCTAD calculations based on data from the -—
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—- and national sources. Data for 2023 are estimated.
Meanwhile, the risk profile in terms of exposure to short-term debtDebt liabilities having a maturity of one year or less; maturity can be defined on an original or reminaing basis -—
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—-. Interests in arrears on long-term debt are included within short-term debt. worsened. From 2009 to 2023, short-term debt increased at an average annual growth rate of 8.3 per cent, outpacing the 7.4 per cent growth rate of long-term external debt. Although long-term external debt still made up most of the external debt stocks in developing economies (70.2 per cent in 2023), the share of short-term debt in the total increased from 23.8 per cent in 2009 to 26.2 per cent in 20231.
In 2023, PPGPublicly guaranteed debt (PPG) is an external obligation of the private sector, the servicing of which is contractually guaranteed by a public unit resident in the same economy as the debtor -—
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—-. Unless otherwise indicated, only long-term debt (maturity of more than one year) is included. debt accounted for more than half (51.4 per cent of the total) of long-term external debt, while PNGPublicly Non-Guaranteed debt (PNG) is an external debt of the private sector that is not contractually guaranteed by a public sector unit resident in the same economy -—
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—-. Unless otherwise indicated, only long-term debt (maturity of more than one year) is included. debt made up 48.6 per cent. From 2011 to 2018, the share of PPG debt in total long-term external debt was smaller than that of PNG. However, since 2019, the share of PPG debt has been increasing and has now surpassed the share of PNG debt.
…and debt servicing costs have risen at an even faster rate for the poorest economies
Rising external debt stock, increased risk profiles, and prolonged higher global interest rates have translated into significantly higher debt servicing costs. SDGSustainable Development Goal indicator 17.4.1 (external debt servicePayments made to satisfy a debt obligation, including principal, interest and any late payment fees -—
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—-. as a proportion of exports of goods and services) is a crucial measure of an economy’s external debt sustainability, as it reflects the government’s ability to meet external creditor claims through export revenues. An increase in this ratio can result from reduced export earnings, higher debt servicing costs, or a combination of both. A persistent deterioration of this ratio signals an inability to generate sufficient foreign exchange income to meet external creditor obligations on an economy’s PPG debt, indicating potential debt distress without multilateral support or effective sovereign debt restructuring.
Figure 2. Debt service continued a sharp rise in 2023 for LDCsLeast developed country and low-income developing countriesSource: UNCTAD calculations based on data from the -—
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—- and national sources. Data for 2023 are estimated.
As figure 2 shows, the ratio of debt service on long-term external PPG to exports has increased over the past decade for all income categories, except high-income economies. For LICsLow-income developing countries the increase has been most dramatic, rising nearly six-fold from 2.8 per cent in 2008, just before the Global Financial Crisis, and to 15.7 per cent in 2023. A similar trend was observed for LDCs, with the ratio increasing significantly from 2.9 per cent in 2008 to 13.2 per cent in 2023. Only HICsHigh-income developing countries have maintained a stable ratio of external long-term PPG debt service to export revenues, hovering around two to four per cent over the last decade. For MICsMiddle-income developing countries, this ratio has also been on an upward trend, nearly doubling since 2010.This figure highlights a diverging pattern among studied groups since the Global Crisis era after 2009.
Another indicator of external debt sustainability is the ratio of debt service on long-term external PPG as a percentage of government revenueThis indicator measures a government’s ability to meet external creditor claims on the public sector through government revenues.. As figure 3 illustrates, the ratio of debt service on long-term external PPG debt has risen sharply in recent years, especially for the poorest developing economies such as LICs and LDCs. In 2023, these two groups of countries spent nearly 20 per cent of government revenues to meet external public debt obligations, a four-fold increase over the last decade. For MICs, this ratio increased by about 30 per cent over the 2013-2023 period, although it has decreased in the last couple of years. These statistics highlight the substantial diversion of domestic resources from sustainable development to servicing external debt obligations in the most vulnerable developing economies, exacerbating the development challenges as interest rates also remain relatively high.
Figure 3. Long-term public debt servicing as a percentage of government revenue continues rising sharply for LDCs and LICsSource: UNCTAD calculations based on data from the -—
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—- and national sources. Data for 2023 are estimated.
Are we in an SDG financing crisis?
The worsening of these two external debt sustainability indicators for LICs and LDCs is concerning. As they cut expenditures to free up resources for external debt payments, pressure on essential public spending will increase, pushing countries further away from achieving the SDGs. Simultaneously, the capacity to generate export revenues and government income to service external debt will shrink further as global growth is estimated to slow from a pre-pandemic rate of 3.2 per cent to 2.6 per cent in 2024, just above the 2.5 per cent threshold commonly associated with a recession, according to UNCTAD’s economists’ forecasts -—
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With resources diverted to servicing debt, several developing economies face an increasing likelihood of unsustainable debt burdens. As creditors continue to be paid, the SDGs become increasingly out of reach, with these economies striving to avoid default. This jeopardises the delivery of existing international commitments, including the 2030 Agenda and the Paris Climate AgreementThe Paris Agreement is an agreement within the UNFCCC aiming is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase even further, to 1.5°C. It aims to strengthen countries’ ability to deal with the impacts of climate change. To reach these ambitious goals, appropriate financial flows, a new technology framework and an enhanced capacity building framework are intended to support developing countries, in line with their national objectives -—
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—-.. The debt overhang has become a major obstacle to development efforts in several developing economies.
As the UNCTAD Bridgetown Covenant -—
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—-, the SDG Stimulus Plan -—
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—- and the Trade and Development Report 2023 -—
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—- put forward, achieving the SDGs requires the international community’s commitment to transform the global financial architecture by prioritising the needs of developing economies. Economies need to be empowered to serve their SDG investment needs, for instance by international and domestic rules for a standstill on debtors’ obligations in case of climate, health and other external crises, such as climate-resilient debt clauses and the approach spearheaded by the World Bank, as initial steps that could benefit all sovereign borrowers needing to invest in the SDGs.
DMFAS strengthening debt management for good governance and transparency
SDG Target 17.4 recognises the importance of assisting developing countries to attain long-term debt sustainability and reduce the risk of debt distress. Similarly, the Addis Ababa Action Agenda -—
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—- stresses the value of prudent borrowing as a tool for financing investment needed for development, and of the critical role of sound debt management in conjunction with debt relief and debt restructuring.
The Bridgetown Covenant -—
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—- also recognizes the importance of continued inclusive dialogue and cooperation with international financial institutions to advance discussions on debt transparency, data quality and debt management capacity. To this end, UNCTAD continues its analytical and policy work and technical assistance on debt issues, including DMFASDebt Management and Financial Analysis System Programme.
Debt data are a prerequisite for effective debt management
Many governments lack the appropriate human and technical capacity to handle public resources and liabilities effectively, as well as to prepare risk analysis and debt strategy. Weak capacity for debt recording and reporting is a significant challenge for developing countries especially. The DMFAS Programme helps governments to address these problems.
Mandated by the UN General Assembly -—
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—- and UNCTAD member States, the UNCTAD DMFAS programme advises developing economies in debt management and helps them to record and report reliable debt statistics for policymaking. The programme offers countries a set of practical solutions for the management of public liabilities and the production of debt statistics, supported by the DMFAS debt management and financial analysis software, capacity development and advisory services. After its inception in the 1980s, DMFAS software is now used by 61 countries and 86 institutions around the world for debt management (map 1). The software is available in four languages (English, French, Russian and Spanish).
Map 1. 61 countries around the world use DMFAS software for debt management, 2023 Source: UNCTAD.
Note: Status as of end of 2023.
UNCTAD has trained 7 155 officers in debt management procedures and best practices between 2014 and 2023. In addition, on average, 380 experts participated in each UNCTAD Debt Management Conference held every second year since 2011 – except for 2021 due to the COVID-19COVID-19 is an infectious disease caused by the strain of coronavirus SARS-CoV-2 discovered in December 2019. Coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes coronavirus disease COVID-19 -—
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—-. pandemicCommonly described by the WHO as ‘the worldwide spread of a new disease’, no strict definition is provided. In 2009, they set out the basic requirements for a pandemic: • New virus emerges in humans
• Minimal or no population immunity
• Causes serious illness; high morbidity/mortality
• Spreads easily from person to person
• Global outbreak of disease.
The US Centre for Disease Control uses a similar approach, but with a reduced set of criteria. It is very difficult to gauge whether the spread of a disease should be termed an outbreak, epidemic or pandemic. In other words, when to declare a pandemic isn’t a black and white decision -—
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—-.. The participant numbers show a remarkable increase in female participants reaching 42 per cent in 2023 compared to 33 per cent in 2018. Nevertheless, this share still falls slightly short of the equal distribution observed in 2016 (table 1).
Table 1. Women are on average well represented in DMFAS capacity development| 2016 | 2018 | 2020 | 2022 | 2023 | ||||||
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| Capacity development category | Total participants | Share of women | Total participants | Share of women | Total participants | Share of women | Total participants | Share of women | Total participants | Share of women |
| Capacity development for debt offices | 751 | 50% | 697 | 33% | 361 | 45% | 609 | 48% | 552 | 42% |
| - Training in debt validation, reporting, analysis and procedures | 282 | 54% | 209 | 35% | 72 | 32% | 211 | 52% | 244 | 45% |
| - Functional training in using DMFAS | 244 | 56% | 216 | 37% | 91 | 55% | 236 | 48% | 232 | 47% |
| - IT related training and advisory services | 152 | 43% | 132 | 17% | 54 | 50% | 62 | 34% | 33 | 18% |
| - Other advisory services | 73 | 33% | 140 | 39% | 144 | 44% | 100 | 45% | 43 | 23% |
| UNCTAD Debt management conference | - | - | - | - | - | - | 431 | 44% | - | - |
Source: UNCTAD.
Debt data transparency and quality of reporting increasing
Over the last ten years, the use of DMFAS software by new countries and comprehensive reporting within the system have increased. In 2023, 93 per cent of countries recorded comprehensive external debt instruments in DMFAS and 80 per cent comprehensive domestic debt records.
The DMFAS capacity building also supports disseminating debt statistics and debt analysis. The number of DMFAS user countries that publish debt statistics bulletins and debt portfolio reviews on a regular basis has increased during the last ten years (figure 4), despite a setback in 2020 mainly due to the disruptions related to the COVID-19 pandemic.
Figure 4. Number of DMFAS user countries publishing regular debt reports has increased but plateaued last yearSource: UNCTAD.
Notes
- The use of IMFInternational Monetary Fund credit accounts for the other 3.6 per cent of total external debt stock
References
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