The Debt Crisis Weighing Down the World’s Least Developed Countries

Debt has become a mounting challenge for developing nations, particularly the least developed countries (LDCs). These nations face higher borrowing costs, weaker debt management capabilities, and limited representation in key international forums that address debt issues.

The COVID-19 pandemic significantly worsened the financial situation for LDCs, driving up public debt, much of it external. The crisis was further compounded by global issues such as the war in Ukraine and the escalating climate emergency. These events have increased the demand for public spending, while currency devaluations have pushed up the cost of repaying foreign debts.

While modest improvements in debt conditions are forecast, concerns persist about the sustainability of LDCs’ debt burdens, especially in the face of future crises. According to the International Monetary Fund (IMF), 20 out of the 43 LDCs assessed are already in debt distress or at high risk of falling into it.

LDCs consistently run higher fiscal deficits than other developing economies, particularly those without significant natural resources. Governments ramped up spending during the pandemic to prop up struggling economies, but revenues continued to decline. By 2021, expenditures rose to 22.5% of GDP while revenues slipped to 17.7%, widening fiscal deficits. Though deficits are projected to shrink in the coming years, even a modest 1% deficit by 2025 could strain these vulnerable economies, limiting their ability to invest in crucial infrastructure and services and jeopardizing their progress toward achieving the Sustainable Development Goals (SDGs).

These challenges are amplified by rising global fiscal deficits and ballooning public debt, especially as many LDCs saw their debt-to-GDP ratios surge beyond 50% after 2020. Even before the pandemic, the debt levels were climbing, and the combined impact of economic shocks, uneven recoveries, and tight monetary policies in wealthier nations only worsened the outlook. By 2023, the debt burden of LDCs had surpassed that of other developing nations despite their lower repayment capacities and systemic hurdles within the global financial system.

As the world braces for further crises, the fiscal space for LDCs is shrinking, yet their development needs are expanding. Though debt levels are expected to slightly decrease between 2024 and 2026, they will remain elevated compared to pre-pandemic levels. Rising commodity prices, natural disasters, and political instability continue to threaten these fragile economies. Additionally, the effects of earlier interest rate hikes in developed countries continue to weigh heavily on LDCs, making debt repayment and refinancing even more challenging.

The structural vulnerabilities of LDCs—shallow tax bases, inefficient tax systems, and reliance on unstable commodity exports—are compounded by costly external debts and currency risks. UN Trade and Development’s 2023 report highlights the urgent need for international debt reforms and expanded fiscal space for LDCs to navigate future economic shocks and make progress towards the SDGs.

The report calls on the G20 to play a leading role in promoting sustainable debt solutions for LDCs. This includes more concessional loans, debt relief programs, and reversing the declining flow of Official Development Assistance, essential to securing long-term financial stability for the world’s most vulnerable economies.

Have you read?
Countries Most in Debt to the International Monetary Fund (IMF).
Most Successful Unicorn Startups.
$100 Billion Club: Richest People With The 12-Figure Fortunes.
Largest electricity consumers in the world, by country (in terawatt-hours).
Countries that Export the Most Goods and Services.