For the first time in history, more than half of low-income countries face a high risk of debt distress. This is partly due to the Covid-19 pandemic, but also a result of years of policies that opened them up to risky international capital flows and allowed private lenders, such as BlackRock and HSBC, to make huge profits. These high-interest loans are often unsustainable, and a growing number of governments are finding it difficult to repay them – or even service their debt interest payments if they cut spending.
The global debt crisis affects both public and private debt, but the risk of debt crises is especially acute for lower-middle income countries, where the impact of soaring interest payments on strained government finances can be devastating. According to a new report by the UN Conference on Trade and Development (UNCTAD), 3.4 billion people live in countries that spend more on interest payments than on health or education.
A debt-reduction plan is needed to address the crisis, but it must be based on sound economic policies. Gradual fiscal consolidation with a focus on improving efficiency rather than draconian cuts can mitigate the negative impacts of high debt levels on growth and social programs and can actually enhance long-term economic prospects.
In the long run, debt can be a powerful tool for developing countries to invest in their people and economies and pave the way to a more sustainable future. But when it becomes a burden, it can lead to financial instability and political turmoil. It is time to take action.
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