Amidst a polycrisis, these countries face an increasingly unsustainable financial situation, with high structural deficits and unaffordable debt, underscoring the urgent need for international action.
Debt is one of the most pressing challenges facing developing nations, especially the least developed countries (LDCs).
LDCs face higher debt costs, tend to have weaker debt management capacities and often lack adequate representation in key multilateral institutions dealing with debt-related issues.
The COVID-19 pandemic severely worsened LDCs’ fiscal balances and increased their total public debts, most of which is external. Other crises, including the war in Ukraine and the climate emergency, have further exacerbated the situation, increasing the demand for key public expenditures and, in many cases, triggering currency devaluations that raised the cost of external debt.
Although some improvement is projected, concerns remain over the sustainability of LDCs’ debt, particularly in the face of future shocks and crises. According to the International Monetary Fund’s (IMF) debt sustainability assessments (April 2024), 20 out of the 43 LDCs for which data are available are either already in debt distress or at high risk of debt distress.
Deficits climb as fiscal spending outpaces revenue
On average, LDC deficits consistently tend to exceed those of other developing economies, although this may not apply to resource-rich LDCs.
In response to the pandemic and lockdowns, governments boosted spending to support their economies, even as revenues declined. In 2019, half of LDCs had revenues below 18.3% of GDP, a figure that fell further to 17.7% in 2021. Meanwhile, their expenditures rose from 20.2% of GDP in 2019 to 22.5% in 2021.
This growing imbalance pushed the typical fiscal deficit in LDCs to a peak of 3.3% of GDP in 2022, before improving modestly to 2.7% in 2023. The IMF projects a further decrease to 1.9% in 2024 and 1% in 2025. But even a 1% deficit, depending on how it is financed, can strain these economies, limiting their ability to invest in essential services and infrastructure and making it more difficult to achieve the Sustainable Development Goals (SDGs).
This strain is exacerbated by the global slowdown’s knock-on effects on the least developed countries, the structural fragility of their public finances and their persistently high debt levels.
Rising debt ratios signal shrinking fiscal space
High fiscal deficits are contributing to rising gross government debt, which represents the total amount a government owes to both domestic and foreign creditors.
Even before the pandemic, LDCs’ debt was on a concerning upward trend, highlighted repeatedly by UN Trade and Development (UNCTAD). Between 2009 and 2019, the median debt-to-GDP ratio rose from 30.8% to 41.6%. The pandemic, followed by an uneven recovery and other factors such as the tight monetary policy of developed economies, worsened the situation, with debt ratios consistently exceeding 50% after 2020.
In 2023, many LDCs’ debt-to-GDP ratio surpassed that of other developing economies for the first time, despite LDCs having a lower repayment capacity due not only to internal factors but also to systemic issues within the global financial and monetary system.
These trends signal shrinking fiscal space at a time when development needs are on the rise due to cascading crises. Although a slight decrease in LDCs’ debt-to-GDP ratio is expected between 2024 and 2026, the median is projected to remain higher than before the pandemic, at 51%.
Forecasts prone to global economic risks
The IMF forecasts slight reductions in both fiscal deficit and government debt ratios due to anticipated budgetary tightening in LDCs. Median government revenue is expected to grow mildly, while the median expenditure is projected to decrease. Nevertheless, numerous risks could jeopardize these efforts, including:
- Further rises in commodity prices due to conflicts, such as those in Gaza or Ukraine, or global shipping disruptions
- Increasing frequency and intensity of natural disasters in LDCs
- The residual effects of earlier monetary policy tightening in developed economies
- The impact of elections this year in many developed and developing countries
Recent anti-inflationary policies in global financial centres have raised interest rates, weakened LDC currencies and posed a significant risk for these economies since much of their debt is denominated in foreign currencies.
This has complicated debt repayments, refinancing and access to new loans. Even as monetary conditions in developed economies begin to ease, the prolonged impact of elevated foreign interest rates may persist, potentially further deepening LDCs’ debt vulnerabilities.
Urgent need for improved debt sustainability in LDCs
LDC fiscal deficits – driven by structural issues such as a shallow tax base, inefficient tax administration, reliance on volatile commodity exports and the burden of costly external debt with currency risk – are worsened by multiple, interconnected global crises.
The core issues are inadequate repayment capacity and the unfavourable characteristics of the debt. As highlighted in UN Trade and Development's “The Least Developed Countries Report 2023,” enhancing LDCs' fiscal space and reforming the international debt architecture are imperative for enabling these countries to withstand future shocks and progress towards the SDGs.
UN Trade and Development urges the G20 to lead in facilitating more sustainable debt management for LDCs through more concessional loans, grants and debt relief initiatives, as well as reversing the declining trend of Official Development Assistance flows to these countries.