Amid a series of global shocks since 2020, the world’s public debt burden has soared, straining government finances and undermining sustainable, inclusive growth. Keeping deficits in check will require tough balancing acts. But for many countries, the road ahead is rocky, especially in developing economies.
Today, more than 50 countries spend more on interest payments than they do on health and education. For low-income countries that have to borrow abroad, high interest rates can rob them of much needed resources and push them into unsustainable debt paths.
Private lenders like banks and hedge funds lent to these countries recklessly, chasing the big profits they offered in an era of unusually low interest rates. Now, 54 low-income countries face unsustainable debt levels, a sharp rise from 22 in 2015.
We need a new system that is fair, transparent and based on principles of sustainability. A major overhaul of the global apparatus for assessing a country’s debt is critical to fortifying the resilience of low-income countries.
It’s time to revert to previous norms for sovereign debt levels – 40-60% of GDP for low-income countries, 60-80% for middle-income and high-income countries. This could help to ease fiscal pressures, keep debt-to-GDP ratios in check and reduce the risk of future crises. It would also give lenders clearer guidance on how to lend responsibly and avoid a repeat of the ill-advised lending practices of recent years. This is the right path for the global economy and the people it serves.