{"id":46705,"date":"2025-07-02T19:23:26","date_gmt":"2025-07-02T13:53:26","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=46705"},"modified":"2025-07-05T18:07:44","modified_gmt":"2025-07-05T12:37:44","slug":"sovereign-debt-rising-in-developing-world","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/02-07-2025\/sovereign-debt-rising-in-developing-world","title":{"rendered":"Sovereign Debt is Rising in Developing World"},"content":{"rendered":"\n<p><strong>Syllabus: GS3\/Economy<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The <strong>fourth International Conference on Financing for Development (FfD4)<\/strong> is being held in Spain which brings focus on the <strong>massive debt burden on developing countries.<\/strong>\n<ul class=\"wp-block-list\">\n<li><strong>Public Debt or Sovereign debt<\/strong> is the <strong>money borrowed by a national government<\/strong> from either domestic or international sources, usually through the issuance of government bonds or loans.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Sovereign debt on Developing Countries<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Since 2010<\/strong>,<strong> sovereign debt<\/strong> in developing countries<strong> has grown twice<\/strong> as fast in developed economies \u2014 with its share in global total increasing to<strong> 30% in 2023, from just 16% in 2010.<\/strong><\/li>\n\n\n\n<li><strong>As per the World Bank 2024 Report,<\/strong> Developing countries spent a record<strong> $1.4 trillion <\/strong>to service their foreign debt as their interest costs climbed to a <strong>20-year high in 2023.<\/strong>\n<ul class=\"wp-block-list\">\n<li>Currently, more than half of developing countries allocate at least<strong> 8% of government revenues<\/strong> to interest payments, a figure that has doubled over the past decade.&nbsp;<\/li>\n\n\n\n<li>The rising pressure of interest payments is substantial across regions, particularly in <strong>Africa and Latin America and the Caribbean.<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full\"><img data-dominant-color=\"c3b7bf\" data-has-transparency=\"false\" style=\"--dominant-color: #c3b7bf;\" loading=\"lazy\" decoding=\"async\" width=\"453\" height=\"435\" src=\"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2025\/07\/public-external-debt-surge.webp\" alt=\"public external debt surge\" class=\"not-transparent wp-image-46725\" srcset=\"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2025\/07\/public-external-debt-surge.webp 453w, https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2025\/07\/public-external-debt-surge-300x288.webp 300w\" sizes=\"auto, (max-width: 453px) 100vw, 453px\" \/><\/figure>\n<\/div>\n\n\n<h2 class=\"wp-block-heading\"><strong>Reason and Factors Contributing to Debt Burden<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Oil Price Shock (1970s): <\/strong>The 1970s saw a sharp rise in oil prices due to geopolitical tensions, including the 1973 Arab Oil Embargo.\n<ul class=\"wp-block-list\">\n<li>Oil-importing developing countries faced a financial squeeze due to rising import bills.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Petrodollar Recycling: <\/strong>Oil-exporting Arab nations deposited their surplus &#8220;petrodollars&#8221; in Western banks.\n<ul class=\"wp-block-list\">\n<li>These funds were loaned to developing countries, enabling them to afford higher oil prices and continue purchasing Western exports.<\/li>\n\n\n\n<li>This system supported Western economies by keeping factories open and avoiding recession.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Rise of Private Lending: <\/strong>Private Western banks began overtaking official sources (like governments or IMF) in lending.\n<ul class=\"wp-block-list\">\n<li>By 1982, banks lent $63 billion annually\u2014nearly double the official lending.<\/li>\n\n\n\n<li>Many developing countries experienced rapid economic growth in the 1970s as a result.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>The Debt Crisis (1980s):<\/strong> A global recession and high interest rates hit in the 1980s.\n<ul class=\"wp-block-list\">\n<li>Developing countries struggled to repay their debts and began borrowing more just to pay interest\u2014a classic debt trap.<\/li>\n\n\n\n<li><strong>Case of Brazil:<\/strong> From 1972\u20131988, Brazil paid $176 billion in interest on a $124 billion debt.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>High Interest: <\/strong>The UNCTAD report showed that developing regions borrow at rates that are 2-4 times higher than those of the US and 6-12 times higher than those of Germany.\n<ul class=\"wp-block-list\">\n<li>This is largely because developing countries are perceived to have a more \u201chigh-risk environment\u201d, and thereby face higher cost of borrowing.&nbsp;<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Biased Sovereign Credit Ratings: <\/strong>Sovereign credit ratings are meant to be independent measures of a country\u2019s ability to pay its debts.\n<ul class=\"wp-block-list\">\n<li>Such ratings are important because they determine the interest rates a country faces in the global financial market and, therefore, its borrowing costs.&nbsp;<\/li>\n\n\n\n<li>Sovereign credit ratings are negatively biased towards the Global South.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<p class=\"has-background\" style=\"background-color:#ebecf0\">Read our detailed article on <a href=\"https:\/\/www.nextias.com\/blog\/sovereign-credit-rating\/\" data-type=\"link\" data-id=\"https:\/\/www.nextias.com\/blog\/sovereign-credit-rating\/\"><strong>Sovereign Credit Ratings<\/strong><\/a>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Concerns<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Rising Interest Burden<\/strong>: In 2023, a record 54 developing countries (38% of total) allocated 10% or more of their government revenues to interest payments.\n<ul class=\"wp-block-list\">\n<li>Nearly half of these countries were in Africa, highlighting regional disparities.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Outpacing Public Spending:<\/strong> Interest payments are increasing faster than critical public expenditures, including on healthcare, education, and infrastructure.\n<ul class=\"wp-block-list\">\n<li>According to the Centre for Science and Environment (CSE), many low- and middle-income countries (LMICs) now spend more on debt payments than what is needed to meet their climate goals.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Growing Debt Service Load: <\/strong>External debt service bills for LMIC governments doubled from $182 billion (2013) to $368 billion (2023).\n<ul class=\"wp-block-list\">\n<li>For one dollar of Gross National Income (GNI) earned, the average developing economy spent 1.6 cents on external sovereign debt servicing in 2013, which rose to 2.5 cents in 2023.<\/li>\n\n\n\n<li>For LMICs, the figure increased from 1.8 cents in 2013 to 2.8 cents in 2023.&nbsp;<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Currency and Financial Instability: <\/strong>Heavy external borrowing in foreign currencies exposes countries to exchange rate volatility.<\/li>\n\n\n\n<li><strong>Loss of Sovereignty and Policy Autonomy: <\/strong>Reliance on International Monetary Fund (IMF) bailouts and bilateral lenders often comes with conditionalities that influence domestic policies.<\/li>\n\n\n\n<li><strong>Climate and SDG Commitments at Risk: <\/strong>Rising debt diverts resources away from climate finance, sustainable infrastructure, and UN SDG targets.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Recommendations for Debt Management<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Restructuring Debt:<\/strong> First, governments should assess the level of their debt sustainability and their ability to reduce it.\n<ul class=\"wp-block-list\">\n<li>Restructuring government debt with creditors before debt levels reach highly unsustainable levels would be an advisable move for any government.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Greater economic growth<\/strong>: To improve economic growth and attract large-scale foreign investment, developing countries need to improve the ease of doing business and reduce red tape.<\/li>\n\n\n\n<li><strong>Improve tax administration<\/strong> and expand the tax base (e.g., via digital tax compliance, reducing exemptions).<\/li>\n\n\n\n<li><strong>Encourage financial inclusion<\/strong> to increase savings and investment in the formal economy.<\/li>\n\n\n\n<li><strong>Strengthen Debt Management Capacity: <\/strong>Build institutional capacity in debt analysis, forecasting, and risk management.\n<ul class=\"wp-block-list\">\n<li>Use tools like Medium-Term Debt Management Strategies (MTDS) and develop domestic debt markets.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Foster International Support and Policy Space: <\/strong>Seek enhanced support from IMF, World Bank, and regional development banks via concessional financing and policy advice.<\/li>\n<\/ul>\n\n\n\n<p><strong>Source: <\/strong><a href=\"https:\/\/www.downtoearth.org.in\/climate-change\/debts-climate-link-why-sovereign-debt-is-rising-in-developing-world\" rel=\"nofollow noopener\" target=\"_blank\"><strong>DTE<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<h3><strong>Context<\/strong><\/h3>\n<li class=\"ms-5\">The fourth International Conference on Financing for Development (FfD4) is being held in Spain which brings focus on the massive debt burden on developing countries.<\/li>\n<p><\/p>\n<h3><strong>Sovereign debt on Developing Countries<\/strong><\/h3>\n<li class=\"ms-5\">Since 2010, sovereign debt in developing countries has grown twice as fast in developed economies \u2014 with its share in global total increasing to 30% in 2023, from just 16% in 2010.<\/li>\n<li class=\"ms-5\">As per the World Bank 2024 Report, Developing countries spent a record $1.4 trillion to service their foreign debt as their interest costs climbed to a 20-year high in 2023.<\/li>\n<li class=\"ms-5\">Currently, more than half of developing countries allocate at least 8% of government revenues to interest payments, a figure that has doubled over the past decade.\u00a0<\/li>\n<li class=\"ms-5\">The rising pressure of interest payments is substantial across regions, particularly in Africa and Latin America and the Caribbean.<\/li>\n<p><a href=\"https:\/\/www.nextias.com\/ca\/current-affairs\/02-07-2025\/sovereign-debt-rising-in-developing-world\" class=\"btn btn-primary btn-sm float-end\">Read\u00a0More<\/a><\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-46705","post","type-post","status-publish","format-standard","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/46705","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=46705"}],"version-history":[{"count":5,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/46705\/revisions"}],"predecessor-version":[{"id":47013,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/46705\/revisions\/47013"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=46705"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=46705"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=46705"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}