World Bank Warns Poor Nations Face Worst Debt Since 2006

The World Bank published a study on Sunday that found 26 of the world’s poorest nations — including Afghanistan, Yemen, Ethiopia, and North Korea — are “in deeper debt than at any other time since 2006.”

The World Bank’s “Poverty, Prosperity, and Planet Report” noted that “poverty reduction slowed to a crawl” after the Wuhan coronavirus pandemic.

“Poorer countries did worse than the wealthier economies in responding to the pandemic. Conflict in Europe and the Middle East then disrupted the supplies of foodgrains and fuel,” the report said.

The result was worldwide poverty rising for the first time in decades, putting the World Bank’s stated goal of reducing extreme poverty to three percent of the global population by 2030 “out of reach.” 

If current trends continue, that goal might be reached by 2055 at the earliest, and eliminating “middle-income” poverty — incomes of less than $6.85 a day — could take the rest of the century.

“The 2020s, in short, are shaping up to be a lost decade — not just for a small set of countries, but for the world as a whole,” the World Bank mournfully concluded, although the report offered some hope that poverty is beginning to decline again.

The poorest nations spotlighted by the World Bank are mostly found in sub-Saharan Africa, although a more relevant common denominator might be brutal authoritarian and Marxist governments, often combined with internal strife that makes even minimal humanitarian aid difficult to deliver.

The report argued that high levels of income inequality are a driver of poverty — not just because of the usual caricature of capitalist exploitation, but because brutal authoritarian regimes tend to have very wealthy ruling classes and a very poor peasant class.

The World Bank delicately noted that “high inequality economies” are “concentrated in sub-Saharan Africa, and Latin America, and the Caribbean” — precisely the places that tend to be ruled by self-described socialist strongmen and warlords. Grabbing the lion’s share of their meager national wealth allows these ruling elites to live in luxury, even as their populations scramble to survive. The elites have very little incentive to focus on poverty reduction — on the contrary, they find impoverished subjects much easier to dominate and terrorize.

“Speeding up the reduction of within-country inequality accelerates progress on poverty reduction. It also builds a stronger foundation for peace and stability,” the report contended.

The World Bank also feared that poverty interfered with efforts to combat climate change, once again delicately stepping around a brutally simple point: environmentalism is a luxury that poor people simply cannot afford.

The report further noted that rich nations have been able to “shield nearly all of their populations from extreme weather events,” while impoverished countries suffer horrific casualties from storms, earthquakes, landslides, and floods.

The World Bank advised the poorest economies to “prioritize long-term growth and better health and education,” while also being “careful to avoid getting locked into carbon-intensive technologies and growth strategies.”

“Ending poverty for the 3 billion people who struggle on less than $6.85 a day would come at a high cost to the environment. By the middle of this century, it would boost global emissions by nearly 50 percent over 2019 levels,” the report agonized.

World Bank Chief Economist Indermit Gill issued a statement along with the report crediting the bank’s International Development Association (IDA) with keeping the 26 poorest economies “afloat” through the pandemic and its aftermath.

“At a time when much of the world simply backed away from the poorest countries, IDA has been their lifeline,” Gill said.

However, the World Bank noted that government debt now consumes 72 percent of the economic output of these poor nations, an 18-year-high that means borrowing more money to deal with natural disasters, or stimulate their economies, will be difficult.

Another debt factor for developing nations is the enormous debt they incurred from Chinese banks to join the Belt and Road Initiative (BRI), although the World Bank did not mention those loans — its report mentioned China only to congratulate it for having “virtually eradicated extreme poverty” within its borders.

The Wilson Center noted in January that “80% of China’s government loans to developing countries have gone to nations in debt distress.” Contrary to the World Bank’s self-congratulatory note about the success of the IDA, many poor nations have turned to BRI as a source of development money, and they often spend that money on projects of dubious economic value.

It is curious that the World Bank did not mention Chinese loans as part of the crushing debt burden faced by poor nations because the Wilson Center cited the World Bank as being among the loudest voices warning about China’s debt traps:

The terms and conditions of BRI financing were often shielded from public view through strict nondisclosure agreements, which in turn set off alarm bells with institutions like the World Bank and the International Monetary Fund. Concerns over broad implications of the BRI model only grew with the sovereign debt defaults of countries like Sri Lanka, where a new international airport and port city failed to attract international investors, and Zambia, which counts China as its biggest creditor. Resulting increases in inflation, currency depreciation, and rising levels of poverty were a recipe for political upheaval. Last July, protestors stormed the Sri Lankan Prime Minister’s office and presidential residence, and this summer in Kenya, more than a dozen people were killed during nationwide protests against sweeping new taxes to repay foreign creditors.

… The costs of debt distress can have very real human impacts. For example, a recent Associated Press analysis of Chinese loans to Zambia found that billions of dollars in financing of infrastructure projects were effective in accelerating economic growth, but also “raised foreign interest payments so high that there was little left for the government, forcing it to cut spending on healthcare, social services, and subsidies to farmers for seed and fertilizer.” With default looming in Kenya, thousands of paychecks to civil servants have been withheld. As chief presidential economic advisor David Ndii put it bluntly on social media: “Salaries or default? Take your pick.”

Analysts noted that over half of China’s loans to developing nations have entered their repayment period, which means the burden of BRI debt is “likely to grow significantly in coming years.”