A growing number of low-income countries face unsustainable debt levels. They are forced to choose between repaying creditors and investing in their people. In Kenya, for example, interest payments consume more than 60% of government revenues, driving up taxes, leading to business failures, mass layoffs and diminished investments in health and education. In the long run, this poses a threat to social cohesion and political stability.
Debt crises aren’t just economic problems – they’re moral and developmental ones. They threaten global peace, security and sustainable development.
There have been four waves of debt build-up since the 1970s, and each ended with financial crises in developing countries. This particular wave is different from the others in two important ways:
First, it’s more rapid than previous surges. Over the last 15 years, developing economies have been taking on debt at a record pace, adding up to more than six percentage points of GDP each year on average. This is more than they can afford, and the odds that it will end in tears are high.
Second, this surge has been accelerated by the biggest increase in interest rates in four decades. As a result, the cost of debt service in developing countries has doubled for half of them, while interest costs as a share of revenue have risen to an all-time high.
The causes of this are complex, but the roots lie in development choices and policies that began with the oil-price shock of 1973-74. When OPEC limited production to quadruple the price of crude, OPEC members put much of their newfound wealth into Western commercial banks. These banks sought to invest it, and lent much of this money to developing countries, often without monitoring how the funds were used.