Earlier this month, the World Bank published its annual report on global debt. Unsurprisingly, the report covered the indebtedness of Low- and Middle-Income Countries (LMICs), including China. However, it scarcely addressed the debt of advanced economies in Europe, Japan, and North America.

According to the report, the debt stock of LMICs stood at US$ 8.8 trillion, an 8.1% increase from 2020 levels. The rise was even higher for poorer countries eligible for International Development Assistance (IDA), whose overall debt stock surged by 17.9%, reaching US$ 1.1 trillion in the same period.

The increase in debt stock has significant fiscal implications. According to the report, LMICs spent 3.7% of their GDP on servicing debt, with 1.1% allocated to interest expenses in 2023. The cost of debt servicing doubled over the past decade, with LMICs repaying US$ 1.4 trillion to lenders in 2023.

These fiscal pressures are not uncommon. In some countries, over 50% of domestic revenues are already spent on debt servicing, leaving limited resources for essential social programs such as education, healthcare, water supply, and infrastructure improvements.

The institutions owed this debt have remained relatively unchanged. In 2023, 15% of the debt stock was owed to multilateral lenders, primarily the World Bank and the International Monetary Fund (IMF)—a 4% increase from pre-pandemic levels. The remainder is owed to unilateral lenders (commercial banks) and creditor nations that form the Paris Club. The Paris Club is an informal group of creditor countries, including Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Israel, Japan, the Netherlands, Norway, Russia, South Korea, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

Debt is likely to continue growing as more LICs rely on foreign credit to fund large-scale infrastructure projects that cannot be financed through domestic revenues. Roads, railways, power grids, and utility lines are predominantly funded by foreign loans. For instance, China has overtaken Europe and America as the largest creditor to African countries. Between 2000 and 2022, China’s loans to African nations amounted to US$ 170 billion, second only to the World Bank, which issued US$ 264 billion over the same period, according to Boston University.

China's lending to African states aligns with its strategic objectives, particularly its access to and control over critical raw material supplies like minerals. Some of the largest recipients of Chinese loans, such as Angola and Zambia, are key suppliers of oil and copper. Oil meets China's energy needs, while copper is essential for manufacturing electrical and electronic equipment.

For LICs, debt distress is becoming increasingly burdensome. Countries such as Ghana, Ethiopia, and Zambia have already defaulted on their foreign loans. Economic growth tied to geopolitical risks has not materialized, resulting in limited tax revenues to service these debts. It will take years to break free from these obligations, leaving the poor to endure a prolonged and harsh struggle.

Policy reforms that could bring meaningful change are either not enacted or poorly implemented due to limited fiscal capacity. While some strong policies exist, they lack effective execution. It will take bold measures and strong-willed leadership for these nations to overcome their mounting debts. Until then, the burden will fall disproportionately on the poor, who bear the consequences of faults not their own.

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