When used transparently and with care, we know that debt can be a powerful tool to finance the development of a country. Prudent debt is a powerful tool for economies and can pave the path to a resilient and sustainable future. It allows governments to invest in their people and grow economically.
Despite this, the poorest nations spend more than $10 percent annually to service their long-term public and government-guaranteed external debt. This is the highest percentage since 2000. Amid this debt crisis that is affecting developing countries, a comprehensive strategy is required.
This 75-country group is served by the International Development Association of the World Bank as a source for concessional financing. Although such financing can be a great source of relief and impact in its own right, more is needed to meet the development challenges, significantly when overlapping crises push many countries into debt distress.
The Program of Creditor Outreach is another way IDA supports countries in achieving sustainable debt. It works proactively to break down information silos and promote communication between countries with various creditors. This program is part of IDA’s Sustainability Development Finance Policy, which encourages debt sustainability and transparency among the poorest countries.
Since I became the director of IDA mobilization a couple of months ago, I have traveled to West Africa, the Eastern Caribbean, and other countries to observe the program in action. I saw first-hand how such discussions are essential for a sustainably managed and responsible debt.
Recently, I visited St. Kitts and Nevis, where IDA and the Eastern Caribbean Central Bank organized a discussion at a high level on debt sustainability. This event brought together ministers of finance and stakeholders from Dominica, Guyana, Haiti, Saint Lucia, and Saint Vincent & the Grenadines. IDA also partnered with the governments of Sierra Leone and Uganda last year to host similar discussions. Given these countries’ complex challenges, including climate change, high debt, high inflation, and poverty, the dialogue was timely.
Four highlights of what we heard at the creditor outreach event.
- Communication and conversation can stop debt crises in their tracks. According to Razia Khan of Standard Chartered, the debt crisis in Eastern and Southern Africa could have been different if, 10-15 years ago, all parties involved paid more attention to mobilizing revenues and paying off that debt.
- Some developing countries–tiny island states–are dealing with debt risk that is compounded by contemporary challenges: As Timothy Antoine, the Governor of the Eastern Caribbean Central Bank, reminded us: “We are also dealing with a climate crisis, and for us in this region, it’s an existential threat.”
- As noted by Elena Duggar of Moody’s Chief Credit Officer for the Americas, Transparency is critical to debt sustainability. It also informs Moody’s analysis of “institutions and governance strength and government fiscal strength”–two of the four major factors we use to analyze sovereign credit worthiness. Richard Francis of Fitch, Director of Sovereign Ratings, also stressed the importance of transparency in debt.
- I heard it repeatedly said that IDA was a valuable source of concessional finance and that the World Bank was a trusted partner. Sheku Bangura, the current Sierra Leone Minister of Finance, noted that the combination of concessional funding from IDA and other sources had provided critical relief in light of rising debt risks, inflationary pressures, and several overlapping issues in the country. Julius Kapwepwe, Director of Programs at Uganda Debt Network, also brought the voice of the civil society to the table, noting that the World Bank had invested in “road sectors, energy and [literacy rate]” in his country.
At every turn, the openness of these discussions has encouraged me. I’ve also been energized by the keen focus that the stakeholders have on finding solutions and moving forward. The magnitude of the debt risk is enormous, but strengthening country ownership and encouraging open discussion are essential steps in the right direction.