Decomposing Changes in Debt Service Ratios in Developing Economies, 2001–2021

Poor countries have been buffeted by the global financial crisis in 2008/2009 and the COVID‐19 pandemic. A deteriorating debt situation can undermine debt sustainability and reduce the chances of achieving the UN's Sustainable Development Goals. This paper analyzes the empirical evidence relating to indebtedness across upper‐middle, lower‐middle and low‐income economies. It focuses on the ratio between debt service and exports, and examines the extent to which changes in this DSR have been associated with changes in its key components: indebtedness and amortization, interest rates, and export performance, as well as by other factors. The paper starts by adopting an accounting approach but then builds on this using a feasible generalized least squares regression model to test more broadly for the causes of changes in the DSR. Although we find that debt accumulation has played an important role, we also find that amortization and interest rates, that affect servicing costs, and export performance have been important. Our regression analysis reveals that the relative importance of debt service rather than simply the stock of debt has been particularly important for low‐income countries towards the end of our study period. We discover that the impact of the pandemic was greater than that of the GFC. We also analyze the relationship between DSRs and debt sustainability, and plot out indicative scenarios for the future and the implications for debt. Finally, we use our empirical findings to critically discuss existing debt policy and suggest the broad direction for future policy.