The World Bank’s chief economist has urged private lenders to contribute to debt forgiveness for the world’s poorest nations, as soaring repayments deplete funds needed for critical sectors like health, education, and infrastructure.Interest payments by low-income countries reached an unprecedented $34.6 billion in 2023, quadrupling over the past decade, according to the International Debt Report.

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Including principal, the 78 poorest nations now allocate $96.2 billion annually to servicing $1.1 trillion in debt.Chief Economist Indermit Gill raised further concerns about private lenders, who have extracted $13 billion more in service payments than they have provided in new financing over the past two years.

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This dynamic has left nations struggling to channel resources into essential domestic priorities such as public health and climate adaptation.The warning highlights the mounting financial strain on low-income countries, exacerbated by pandemic-driven spending increases and rising global interest rates.

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Defaults in nations like Sri Lanka and Zambia, alongside near-default situations in countries such as Pakistan and Kenya, underscore the urgency of a comprehensive debt relief solution, including private sector participation. Efforts to achieve such agreements, however, have faced repeated setbacks.

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“It’s time to face the reality: the poorest countries facing debt distress need debt relief if they are to have a shot at lasting prosperity,” Gill wrote in the forward to the report released Tuesday. “Private creditors that make risky, high-interest loans to poor countries ought to bear a fair share of the cost when the bet goes bad.

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”For all developing countries, including massive and stable economies such as China and India, total debt payments hit $1.4 trillion last year — including interest of $406 billion — on $8.8 trillion in debt. Over the past two years, that broader group has paid private investors $141 billion more than they’ve seen in new loans, according to the World Bank report.

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“That reflects a broken financing system,” Gill wrote, adding that the idea hatched a decade ago that private capital could flood into poor countries to turbocharge development “proved to be a fantasy.”Gill’s assessment coincides with World Bank President Ajay Banga prioritizing efforts to attract more private investment to support development projects in collaboration with multilateral lenders.

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In partnership with the International Monetary Fund, the bank is also guiding debt-laden countries toward adopting strategies that strengthen their economies and reduce borrowing expenses.A significant portion of the debt was accumulated in the years before Covid, as nations took advantage of low-interest rates, particularly from China and private creditors, who have become major lenders to poorer countries.

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The situation worsened during the pandemic, as governments resorted to emergency spending, followed by a surge in interest rates aimed at curbing post-pandemic inflation.The consequences are still playing out. A report by credit rating firm S&P Global in October predicted that “sovereigns will default more frequently on foreign currency debt over the next 10 years than they did in the past.

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”The flight of private capital from emerging markets has continued this year. Investors using hard currencies such as dollars or euros have pulled roughly $13.6 billion from emerging-market debt funds in 2024, after withdrawing almost $23 billion the previous year, according to data from Bank of America.

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The biggest risks are concentrated among the 78 poorest countries categorized by the World Bank as eligible to receive low- or no-interest financing and grants from its International Development Association fund.Many of those countries face “a metastasizing solvency crisis that continues to be misdiagnosed as a liquidity problem,” Gill wrote.<img src="

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