Debt can be a vital tool for countries to finance development and provide social services, but it becomes a burden when it’s growing too fast. This is the case in many developing economies, where debt is on a dangerous rise – with consequences for global growth and the world’s poorest people.
The roots of today’s debt crisis go back nearly 30 years. When the Organization of Petroleum Exporting Countries quadrupled oil prices in 1973, OPEC nations deposited much of their new wealth in Western commercial banks. The banks, seeking investments for this money, lent it to developing countries. Many of these loans were made hastily and with little scrutiny. Some of the funds were used for projects that did not benefit the poor, such as armaments or failed large-scale development programs. Others were diverted into speculative investments and corruption.
Today, the world faces a fourth wave of rapid debt accumulation in emerging and developing countries. This debt build-up is more severe than previous ones, mainly because it has happened at a time of weak growth prospects and elevated global risks.
Public debt is on a steep upward trend in most countries, with two-thirds of the 175 developing economies we study now carrying higher debt levels than before COVID-19 and borrowing at a faster pace. In addition, the cost of servicing external debt has risen sharply, reflecting rising net interest costs in advanced economies and higher inflation. Private-sector debt is increasing in some large emerging markets and developing countries, such as Brazil or India, while falling in others, such as Colombia or Thailand.