Experts want more support for countries faced with liquidity challenges

Omeiza Bilal

Analysts say many countries are being squeezed by increasing interest payments and high debt redemptions.

According to the analysts at the World Bank, the economic scarring of the pandemic, conflicts around the world, and the abrupt rise in global interest rates have had more impact on low-income countries.

Writing in the IMF Blog, Ceyla Pazarbasioglu and Pablo Saavedra, noted that median low-income country were spending over twice as much on debt service to foreign creditors as a share of revenue than it did 10 years ago—roughly 14 percent at the end of 2023 from 6 percent 10 years earlier.

“Following years of substantial borrowing, debt redemptions in low-income countries over the near term are almost triple their long-term average: about $60 billion compared to an annual average of $20 billion from 2010 to 2020.

“While we avoided a systemic debt crisis so far, higher interest payments and debt redemptions are stifling growth and employment while also placing significant pressures on many countries’ public finances. This comes at a time when countries need critical investment to achieve sustainable and inclusive economic growth and adapt to climate change. Left unaddressed, these liquidity pressures may lead to solvency problems for many vulnerable countries. In other words, what is now a squeeze on public finances could morph into a debt crisis, with substantive implications for growth, job creation, and poverty,”

The global community must act now to avoid this outcome, they said.

Part of the approaches to addressing the challenges includes, domestic resource mobilization, international support, and reducing debt servicing burdens.

“New solutions are needed to support countries that do not have solvency problems but need to manage the high debt servicing levels. These include mechanisms by multilateral or bilateral partners to mobilize new financing, including from the private sector, at affordable terms using credit enhancements to refinance existing debt. Countries could also pursue liability management operations, including debt-for-development swaps and debt buybacks where appropriate,” they stated.