Rising Debt Burdens, The Impact on Public Spending, and the Coronavirus Crisis

Even before the coronavirus crisis, since 2011 debt payments have grown rapidly for lower income countries. In this paper we analyse debt payments for 63 countries with figures available from the IMF and World Bank. We find that average public external debt service has increased from a low of 5.5% of government revenue in 2011 to 12.4% in 2019, an increase of 125%. Based on IMF and World Bank projections, we estimate that payments would have increased to between 12.8% and 17.4% of government revenue by 2022 before the impact of the COVID crisis. The coronavirus crisis has dramatically worsened the debt situation for many countries. For the 60 countries with data, we then analyse how public spending per person has changed in real terms between 2015 and 2019 and compare this to public external debt service and domestic debt interest payments. We find that of the 15 countries spending over 18% of government revenue on debt payments, public spending fell in 14 of them. For the 30 countries with the highest debt payments, average real public spending per person fell between 2015 and 2018 by 6%, and while the IMF projected it would grow in 2019, average real public spending per person in these countries will still be 0.3% lower in 2019 than 2015. In contrast, for the 30 countries with the lowest debt payments, real public spending per person on average increased by 21% by 2019 on 2015 levels. There is, therefore, a significant link between higher debt payments and falling public spending. This suggests that countries with high debt payments have little room for more borrowing, and that the net impact of borrowing for such countries has been to cut public spending. Meeting the SDGs will be very difficult unless public spending can increase significantly. We call for the cancellation of debt payments to enable poor country governments to increase funding for healthcare and social protection, and the creation of a more responsible lending and borrowing framework to help prevent future crises.