A recent report by the World Bank reveals that over the past four decades, Nigeria and other developing nations have allocated an astonishing $441 billion towards paying off debts. The report further highlights Nigeria position as the leading recipient of new loans in 2022, having received a substantial $2.9 billion. Tanzania closely follows, having secured $2.7 billion in loans during the same year, according to the World Bank’s International Debt Report for 2023. As of June 30, 2023, Nigeria external debt stock report from the Debt Management Office revealed an outstanding obligation of $14.51 billion owed to the World Bank.
The World Bank issued a statement cautioning that low-income nations face a looming threat of financial crises owing to the sudden rise in global interest rates. It emphasized that as global interest rates experienced their most significant ascent in the past forty years, developing countries found themselves compelled to allocate an unprecedented $443.5 billion to service their external public and publicly guaranteed debts during the year 2022. According to the statement, the surge in interest rates has resulted in the allocation of limited resources being redirected from essential sectors like education, healthcare, and the environment.
60% of low-income countries are in a perilous state of debt.
As per the statement, it was mentioned that developing nations experienced a 5% surge in debt-servicing expenses, comprising both principal and interest payments, compared to the previous year. A record amount of $88.9bn in debt-servicing was paid by the 75 eligible borrowing nations from World Bank’s International Development Association in 2022, which aids the most destitute countries. These countries witnessed a fourfold increase in interest pay-outs over the last ten years, reaching an unprecedented peak of $23.6bn in 2022. The 24 poorest countries are projected to witness a significant surge of up to 39% in their debt-servicing expenses in 2023-2024.
According to the Bretton Woods Institution, an increase in interest rates has heightened the susceptibility of all developing countries to debt. A significant rise in sovereign defaults has been observed over the past three years, surpassing the combined number of defaults witnessed in the preceding two decades, impacting ten developing nations. Disturbingly, approximately 60% of low-income countries currently find themselves in a perilous state of debt or are on the brink of entering one. Developing nations’ debt service payments are impacted by the strength of the US dollar, as stated by the World Bank.
Consequences of soaring interest rates is concerning.
It was reported that developing countries are facing exacerbated challenges due to the robust US dollar, resulting in increased expenses for making payments. In such circumstances, if interest rates surge or export earnings sharply decline, these countries could be pushed towards a breaking point. As the costs of debt payment have risen, the availability of new funding alternatives for these nations has significantly diminished. Indermit Gill, the Chief Economist and Senior Vice President of the World Bank Group, expressed concerns about the consequences of soaring interest rates. Gill said the accumulation of significant debt and the prevailing high interest rates have pushed numerous nations towards an impending crisis.
With the burden of escalating interest rates quarterly, developing nations are forced into a daunting dilemma: service their towering public debts or channel funds into pressing priorities like public health, education, and infrastructure development. It is imperative that debtor governments, private and official creditors, and multilateral financial institutions collaborate swiftly and harmoniously to ensure enhanced transparency, improved debt sustainability mechanisms, and expedited restructuring procedures to alleviate the situation. These statistics shows that a growing percentage of developing nations are teetering on the edge or are already overwhelmed by debt burden due to the compounding and overlapping crises they confront.
Debt service-to-revenue ratio for Nigeria in 2023 stands at 73.5%.
Due to soaring interest rates, the strict global financial condition, the strong US dollar gaining strength, rising investor reluctance to take risks, and a surge in borrowing over the past few years, several developing economies find themselves trapped in debt crises. The Debt Management Office (DMO) describes Nigeria’s debt service-to-revenue ratio for 2023, which stands at an alarming 73.5 percent, as both unsustainable and menacing. In the first quarter of 2023 alone, Nigeria had already spent ₦874.13bn on domestic debt servicing, while it spent $801.36m (₦368.87bn) on external debt servicing, giving a total of ₦1.24tn.