Countries in debt crisis cut public spending in face of soaring prices

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New figures released today by anti-poverty campaigners Debt Justice show that countries in debt crisis are expected to spend less in 2023 than in 2019, despite the urgent need for public expenditure in response to surging food and fuel prices.[1]

Lower income countries with the highest debt payments have seen public spending drops of an average of 3% between 2023 and 2019.

Increased public spending on essential services and infrastructure is vital for responding to soaring food and energy prices, climate crisis and other national needs, but the lack of effective debt relief mechanisms is forcing countries in debt crisis to cut public spending in order to make debt payments.

The research by Debt Justice is being released today ahead of an inquiry by the UK Parliament’s International Development Select Committee into the debt crisis in low income countries.[2] The UK has significant power to make private lenders take part in debt relief as 90% of bonds of countries eligible for the G20’s debt relief scheme are governed by English law.[3]

Tess Woolfenden, Senior Policy Officer at Debt Justice said:

“Lower-income countries are being forced to prioritise debt payments over public spending on healthcare or access to food, right at a time when spending is so urgently needed. The UK must act to make private lenders take part in debt relief. Debt repayments to wealthy lenders should not take precedence over people’s needs in a time of multiple crises.”

Abu Bakarr Kamara, Coordinator at the Budget Advocacy Network in Sierra Leone said:

“With Ebola and Covid-19, Sierra Leone has faced two major health crises in recent years, which have collapsed the health sector and the economy. Yet debt payments are taking away resources that are vital for recovery. Cancelling Sierra Leone’s debt is one vital tool to help the Government increase its fiscal space to invest in the health sector in a transparent and accountable way.”

Debt Justice has used IMF data to calculate external government debt payments and public spending cuts for 41 countries where there is information.

The countries with highest debt payments of over 15% of government revenue faced a drop in public spending of 3% between 2019 and 2023, compared to an increase of 14% for the countries with the lowest debt payments.

The Covid-19 pandemic has significantly increased debt levels in the last 2 years. External debt payments are now at the highest level since 2001.[4] Rising US and global interest rates, rising food and energy prices and the global impacts of the Ukraine war could significantly exacerbate debt levels further.

The G20 created a new debt relief scheme at the end of 2020, called the Common Framework, but none of the countries which have applied for it have yet had any debt cancelled. Private creditors could make large profits from their loans to lower income countries if repaid in full.[5]

Faced with the prospect of an intensifying debt crisis in 2022, the IMF has called for faster action on debt relief by compelling private sector participation in the Common Framework. On 21 April 2022 IMF Managing Director Kristalina Georgieva said: “We also are pressing for some of the changes, legal changes that need to happen in New York, in London, to close loopholes for vulture funds and others to prevent debt resolution.” [6]

Graph. Index of change in real public spending per person between 2019 and 2023, grouped by the 11 countries with lowest debt payments, 11 countries with the highest debt payments, and 19 countries with middle levels of debt payments

Case studies
Ghana, Malawi and Sierra Leone are three of the countries with high debt payments and stagnating or falling public spending. Ghana’s external debt payments are over 40% of government revenue. Between 2022 and 2025 57% of its debt payments are to private lenders, 21% to multilateral institutions and 12% to China. The IMF expects real public spending per person to be around the same level in 2023, 2024 and 2025 as 2019.

In Malawi, the IMF expects real public spending per person to be 0.5% less in 2023 than in 2019. Malawi’s debt payments have suddenly increased due to expensive commercial loans taken on during the pandemic to fund imports. The interest rates on the commercial loans could be as high as 15%.

Sierra Leone’s high debt burden was created during the Ebola crisis in 2014 and 2015 but has been added to with loans during the Covid pandemic. The debt crisis has led to mass public spending cuts. In 2023 the IMF expects real public spending per person to be 20% less than in 2015, and 4% less than in 2019. This low level of spending is then expected to be maintained until at least 2025. Between 2022 and 2025, 46% of Sierra Leone’s external debt payments are to the IMF, 35% to other multilateral institutions and 19% to other governments.