Introduction

As the global COVID-19 pandemic of 2020–22 recedes into history, its impact on the debt burdens of low- and middle-income countries (LMICs)—and particularly the world’s poorest countries—remains. Policies implemented to deal with the pandemic, many of which are still largely in place, continue to strain the budgets of these countries, which tend to rely heavily on external financing from official and private creditors to fund their social and fiscal priorities.

LMICs accumulated significant debt during the pandemic years to fund massively expanded health services and compensate for dramatically reduced economic activity and government income. That accumulation continued apace in 2023, with LMICs adding another US$633.1 billion to their debt stock, an 8.1 percent increase over the 2020 level. Consequently, LMICs’ debt currently stands at a record US$8.8 trillion. The increase was proportionally larger for the poorest nations—those eligible for assistance from the International Development Association—where external debt has risen 17.9 percent since the onset of the pandemic in 2020 and now stands at a record US$1.1 trillion.

LMICs now have significantly higher debt levels overall than in the decade that preceded the pandemic, and servicing that debt has become an ever-larger burden on their economies and limited resources. In 2023, LMICs spent 3.7 percent of their gross national income to service their debt, including 1.1 percent of gross national income on interest payments alone, which was the highest amount of the past two decades. Such increased debt service burdens have a significant negative impact on spending by those governments on other priorities. A recent World Bank statistical analysis shows that, when debt service burdens rise, the levels of spending on agriculture, the environment, and education fall; this report quantifies those spending decreases.

The composition of external borrowing has also changed since the onset of the pandemic. As private creditors became risk averse and pulled back on lending to LMICs, multilateral creditors—particularly the World Bank—stepped in to provide support. In 2023, LMICs owed 15 percent of their overall external debt to multilateral institutions, a significant 4-percentage-point increase from prepandemic levels. Although private creditors increased lending to LMICs in 2023, net debt outflows from LMICs to bondholders— US$1.2 billion in 2023—indicate that investor confidence has yet to return to prepandemic levels.

Pandemic-induced economic bottlenecks across the globe, coupled with fiscal policy actions taken by governments in reaction to COVID-19, helped drive global inflation higher while reducing fiscal space for many countries, especially LMICs. Moreover, monetary policy actions in response to rising global prices—by central banks of high-income countries in particular—drove interest rates much higher. This rise in global rates significantly increased debt service burdens for LMICs’ existing long-term debt contracted on variable rates—interest payments on long-term variable rate loans were 14 percent of long-term debt service in 2023, up from 10 percent the previous year—while rendering new external borrowing more expensive. Although global rates look likely to begin falling soon, they remain high and continue to put pressure on LMICs’ budgets, and the increase in debt servicing costs is expected to moderate only gradually as global interest rates decline.

On a positive note, LMICs’ economies are growing again, with average growth of 4.2 percent so far in 2024 that is expected to remain relatively stable over the next two years. Because of an increase in activity among commodity exporters and some stabilization in fragile economies, growth in low-income countries is expected to be even higher. This higher, steadier growth should provide LMICs with some measure of relief to manage their rising debt service burdens.

Still, the risks remain. They include an escalation of armed conflicts, further trade fragmentation, persistent global inflation, a weakening of global risk appetite, and weak growth in major LMICs, especially China. Any one of these factors could drive debt burdens higher for many LMICs.

For this reason, accurately tracking LMICs’ debt levels and debt trends is more important today than ever. Diagnosis is a large part of any cure, and the international community can address debt vulnerabilities and debt distress levels only if it has the data to show precisely how much debt borrowers carry and how it is evolving. To that end, the World Bank, other multilateral institutions, debtor and creditor country governments, and academia are working together to increase debt transparency among LMICs, including crucial reconciliation of the claims of Group of Seven countries and other members of the Paris Club with debtor records. Although much remains to be done, remarkable progress has already been made to further the debt transparency agenda.

The COVID-19 pandemic did significant damage to economies around the world. Although global economic activity has rebounded strongly, the debt incurred in the process—particularly by LMICs—remains. Much work must therefore be done to bring LMICs’ debt levels and debt service burdens back to a reasonable and manageable position.