The world’s 26 poorest economies, home to 40% of people living on less than $2.15 a day, are facing their worst debt levels since 2006. They are increasingly vulnerable to natural disasters, conflict, and economic shocks. This is according to a new report from the World Bank, which paints a grim picture of their financial situation.
These economies have been hit harder than most by recent global events, especially the COVID-19 pandemic. While other countries have mostly recovered, low-income nations have not. In fact, they are poorer on average now than they were before the pandemic. Government debt now stands at 72% of GDP, an 18-year high. Almost half of these nations are in debt distress or at high risk of it. This is double the number from 2015, says the report.
Decline in International Aid
International aid, once a lifeline for these economies, has dwindled. In 2022, official development assistance fell to 7% of GDP, the lowest level in 21 years. This leaves these nations with limited options for low-cost financing, forcing them to rely on expensive alternatives.
The World Bank‘s International Development Association (IDA) has stepped in as the largest source of aid. In 2022, IDA provided nearly half of all development assistance to the world’s 26 poorest economies.
IDA: THE LIFELINE FOR VULNERABLE ECONOMIES
“At a time when much of the world simply backed away from the poorest countries, IDA has been their main lifeline,” said Indermit Gill, Chief Economist at the World Bank. Over the past five years, IDA has funneled resources into these struggling nations.
IDA has supported job creation, improved healthcare, provided education, and brought basic necessities like electricity and clean water to millions. Despite these efforts, rising debt levels and shrinking aid pose significant risks to long-term development.
PANDEMIC WORSENS FISCAL DEFICITS
The COVID-19 pandemic severely strained the finances of low-income economies. In 2020, their deficits tripled to 3.4% of GDP as spending needs surged. Today, their deficits remain at 2.4% of GDP—nearly three times that of other developing nations.
Governments in these countries have shifted their spending priorities. Instead of investing in health, education, or infrastructure, they are focused on immediate concerns like paying government workers and servicing debt. This leaves little room for long-term growth and development.
LONG-TERM CHALLENGES FOR POOREST ECONOMIES
These economies face several long-term challenges. Many are rich in natural resources and have growing workforces, offering significant growth potential. However, two-thirds of these countries are either in conflict or suffer from social and institutional instability.
Most of these countries are also commodity exporters, leaving them vulnerable to the boom-and-bust cycles of global markets. Wars and commodity price slumps severely impact their economies. Wars alone can worsen a country’s fiscal balance by 1.5 percentage points of GDP. Commodity price slumps tied to global recessions can increase their debt by up to two percentage points of GDP.
IMPACT OF NATURAL DISASTERS
Low-income economies are especially vulnerable to natural disasters. Between 2011 and 2023, natural disasters cost these nations 2% of their annual GDP. This is five times the average loss experienced by lower-middle-income countries.
These countries also bear the brunt of climate change. Adapting to these changes costs them 3.5% of their GDP every year, five times what lower-middle-income countries must spend. This puts additional strain on already fragile economies.
THE PATH FORWARD: CHALLENGES AND SOLUTIONS
The World Bank’s report shows that while low-income economies face significant obstacles, there are also ways forward. These economies need to improve their tax systems and public spending efficiency. Simplifying taxpayer registration and tax collection can help broaden their tax base. Apart, better managing public resources can also lead to better outcomes.
But these countries cannot tackle these problems alone. They need increased international cooperation and investment. IDA remains a vital partner, helping to facilitate structural reforms and mobilize private sector resources.
BOOSTING DOMESTIC RESOURCES AND EFFICIENCY
“There is much that low-income economies can—and must—do for themselves,” says Ayhan Kose, the World Bank’s Deputy Chief Economist. Improving tax collection, reducing corruption, and ensuring that public money is spent efficiently are key actions that could lead to fiscal improvement.
But these actions alone won’t be enough. According to Kose, low-income economies will also need greater international cooperation. This could come in the form of trade agreements, increased foreign investment, and additional support from IDA.
IMPORTANCE OF IDA FOR ECONOMIC RECOVERY
IDA’s role in low-income countries cannot be overstated. The association’s grants and near-zero-interest loans provide critical support for 77 of the world’s most vulnerable economies. For the 26 poorest, IDA’s contributions are even more significant. In 2022, it provided nearly half of all the development aid these countries received.
IDA has a strong track record of delivering affordable financing, sound policy advice, and effective development programs. With increased support from the international community, IDA could do even more to help low-income economies tackle their challenges.
LOOKING AHEAD: MEETING 2030 DEVELOPMENT GOALS
The analysis from the World Bank highlights the urgent need for investment in low-income economies. The costs of inaction are too high. If these nations are to meet key development goals by 2030, they will need to ramp up investment on an unprecedented scale.
According to the report, this will require a dramatic increase in performance on every level of economic management. Governments must prioritize long-term investments in health, education, and infrastructure. They must also strengthen their capacity to handle economic shocks and natural disasters.
URGENT ACTION REQUIRED
As the world faces growing inequality, low-income economies are at risk of falling further behind. Their challenges are vast, from debt distress and shrinking aid to natural disasters and the lasting impact of COVID-19. Yet, with the right mix of international support and domestic reforms, there is hope for recovery.
The world cannot afford to turn its back on these economies. Their recovery is essential not only for their citizens but also for global stability. Stronger economies lead to stronger societies, greater peace, and increased prosperity worldwide.