Debt-service payments by developing countries increased to their highest level on record last year, and are expected to increase further in full 2023, thus limiting their ability to attract foreign direct investment (FDI) to get out of debt spirals.

In 2022, low- and middle-income countries paid a record $443.5bn to service their external public and publicly guaranteed debt, an increase of 5% from a year earlier, according to the World Bank. This year, debt-service payments for the poorest countries are expected to reach $0.5tn.

“Record debt levels and high interest rates have set many countries on a path to crisis,” said Indermit Gill, the World Bank’s chief economist. With sustained higher interest rates, more distressed countries face the “difficult choice of servicing their debts or investing in public health, education and infrastructure”, he added.

Among the 75 poorest countries able to borrow from the World Bank’s International Development Association, debt-service payments have more than quadrupled over the past decade.

FDI attraction is important in this paradigm, given it can boost economic growth and bring necessary foreign exchange reserves into economies. Mr Gill urges debt-distressed countries to improve their domestic investment climate to attract longer forms of capital, but warns that debt itself is an impediment.

“Until you address the public [and private] debt problems in these countries … you’re not going to get the sort of robust FDI flows that we saw after the global financial crisis,” said Mr Gill. He continued that public debt is one of the main risk factors cited by potential foreign investors about developing countries.

“If these countries are super-highly indebted, then [investors] basically assess the growth prospects of these countries as either low or very risky,” he said. 

In 2022, total net debt flows not only fell, but even turned negative (–$185bn) for the first time since 2015, meaning that debt repayments by developing countries to foreign bondholders exceeded the amount of new debt these countries borrowed in 2022. 

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Amid heightened geopolitical tensions and difficult global economic conditions, portfolio equity flows to developing countries also fell by 81% to $11bn last year.

The sentiment of foreign  investors appeared equally downcast. FDI to the poorest countries in 2022 declined year-on-year by 28% to $479bn, according to Unctad figures cited by the World Bank.

Mr Gill noted that another barrier to the recovery of FDI in debt-distressed countries has been the slow rate of recovery in international trade within these countries. 

Over the past decade, the World Bank noted that accumulation of external debt in low and middle-income countries has outpaced gross national income growth and global trade, despite the recent rebound from the Covid-19 pandemic. 

Overall debt-servicing costs for the 24 poorest countries are expected to rise in 2023 and 2024 by as much as 39%. 

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