Lower income country borrowing costs rise at three times the rate of the US

New analysis by Debt Justice finds that average interest rates on new borrowing by lower income countries have increased by 5.7 percentage points this year, almost three times the rate of increase in US government borrowing costs. Furthermore, for two-thirds of lower income countries where there is data, interest rates are so high they are probably unable to take out new loans from external private lenders.

The worsening of financial conditions, alongside the climate emergency, is intensifying debt crises in many lower income countries. The number of countries defaulting on or restructuring debt could rapidly increase. Action to tackle debt problems will be discussed at the IMF and World Bank Annual Meetings in Washington DC from 10-16 October.

Heidi Chow, Executive Director of Debt Justice, said:

“Many countries were already cutting essential spending to cope with the debt crisis, before rising interest rates made an alarming situation even worse. Countries like Pakistan are also facing colossal costs from widespread devastation caused by the climate emergency. We urgently need mechanisms to quickly cancel debts for countries in need, especially high interest loans from private lenders.”

Bhumika Muchhala, Senior Advisor on Global Economic Governance, Third World Network, said:

“While the US Federal Reserve has repeatedly raised its interest rate in response to the global inflation spike, there is little to no regard of the adverse spillovers imposed on developing countries across the world. These findings are an urgent call for a multilateral debt restructuring mechanism where all creditors – private, government and multilateral – participate, as well as a rethink of exchange rate liberalization and domestic monetary tightening as a strategy to secure market confidence in developing countries.”

Of the 27 lower income governments with public information available on their foreign currency bonds, Debt Justice finds that nine have yields over 20%: El Salvador, Ethiopia, Ghana, Maldives, Pakistan, Sri Lanka, Tunisia, Ukraine and Zambia. A further ten have yields between 10% and 20%: Angola, Cameroon, Egypt, Honduras, Kenya, Mongolia, Nigeria, Papua New Guinea, Rwanda and Tajikistan. The yield is a measure of what the interest rate would be on new loans from the private sector, though yields of over 10% suggest borrowing will not be possible.

As well as the rise in borrowing costs, the analysis finds that for the 27 countries covered in the study, the dollar has increased in value by an average of 14% compared to local currencies. Because external debts tend to be owed in foreign currencies, especially the dollar, this immediately increases the relative size of debt payments in local currencies.

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