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The world's poorest countries in particular are at risk of being crushed by the high interest rates on their national debt, warns the International Monetary Fund. How can the IMF and World Bank respond to this?
The annual meeting of the International Monetary Fund (IMF) and the World Bank has been taking place since Monday. An important topic on the agenda: the high level of debt in many countries. According to the IMF, global government debt will exceed $100 trillion (93 percent of global GDP) by the end of this year.
The debt level will continue to rise until the end of the decade – driven primarily by even more debt from China and the USA, the IMF predicts in its newly published “Fiscal Monitor”.
The IMF and World Bank are United Nations agencies. One of their most important tasks is to help countries in financial distress and to stabilize them again through conditional loans. But the debt crisis in the Global South has not gotten better in recent years, but rather worse.
The countries in this group are of particular concern to the Monetary Fund. They often have debts that are significantly lower than in industrialized nations such as France, Japan, the USA or England. Mali, for example, has a debt level of around 50 percent of gross domestic product – England, on the other hand, has a debt level of more than 100 percent and the USA even more than 125 percent.
A lot of money flows in Debt settlement
But IMF head Kristalina Georgieva warned before the annual meeting of the IMF and the World Bank: “As debts rise, the fiscal space in low-income countries shrinks disproportionately – not all debt burdens are equal,” she said.
According to the 2024 report “A World of Debt” by the UN Conference on Trade and Development, in 2022 developing countries paid $49 billion more to their foreign creditors than they received in new disbursements. Because of their lower creditworthiness, many of these countries pay significantly higher interest rates on their debts than developed countries.
Too little money for health and education
40 percent of the world's poorest people are poorer today than before the pandemic. And one in four countries in the world now spends more money on loan interest than on the health and education of its citizens, says Richard Gowan, director of the independent think tank Crisis Group ARD-Interview: “Many of these poorer countries find it very difficult to get the loans they desperately need from the World Bank and the IMF.”
Some countries, especially in the Global South, have introduced austerity measures in recent years in order to reduce debt – which often placed a significantly greater burden on the poorest. Many countries are also threatened with default. Many international actors emphasize that a lot of investment in measures against climate change is required right now. Investments are also needed to stimulate economic growth, according to the IMF.
Loan costs for Debtor states should sink
The United Nations decided to reform the international financial architecture immediately before its General Assembly in September. The IMF and the World Bank should support developing countries more than before, according to the “Pact for the Future,” which was negotiated under the leadership of Germany and Namibia. Above all, poor countries should be able to get loans more easily, as UN expert Richard Gowan says: “The 'Pact for the Future' calls on rich countries to invest more money in development aid. And it demands that the decision-making bodies of the IMF and… The World Bank should be reformed in such a way that it becomes fairer for countries in the Global South.”
The decisions in the “Pact for the Future” are not binding for the UN member states. Nevertheless, Gowan sees this as a “very strong message from non-Western countries”: the status quo of the international financial architecture cannot be maintained like this.
As a first measure, the Monetary Fund has already announced that it will reduce borrowing costs for several debtor countries. Several countries that pay particularly high surcharges for loans that are not serviced on time will receive relief of 36 percent annually. However, it is not to be expected that these penalty interest rates or “commitment fees” will be completely abolished, as many organizations and economists have called for, says expert Richard Gowan.
But the IMF also sees industrialized nations as being at risk if they continue to pile up their mountain of debt: “Experience shows that high levels of debt and the lack of credible budget plans can trigger negative market reactions,” says a current IMF article on the subject of national debt. The authors warn: The longer you postpone debt reduction, the more costly it will be. In addition, industrialized countries are also increasingly vulnerable to global factors that influence their borrowing costs.
Warning about less investment
Just what to do? Authors from the IMF and World Bank have several pillars in mind for the industrialized countries: “Push forward social reforms, reset spending priorities and increase revenues where the tax burden is low.” There are warnings about cuts in public investment. This could have negative effects, for example in the form of production losses, which would harm long-term growth prospects. The IMF also warns on the subject of social cuts: These could increase inequality.
At the same time, the income side should be improved. The options here range from higher taxes, more efficient tax administration to a stronger fight against tax evasion. Especially globally, when it comes to taxes, there is “considerable untapped potential to increase revenue,” according to a joint analysis by the IMF and the World Bank from this summer.
The annual meeting of the IMF and World Bank until Sunday will also focus on financing the fight against climate change and combating poverty.
With information from Martin Ganslmeier, ARD Studio New York.
