By David Lawder

WASHINGTON (Reuters) – The World Bank on Tuesday announced that developing countries spent a record $1.4 trillion to service their foreign debts in 2023 as interest costs hit a 20-year high, straining budgets for essentials such as healthcare, education, and environmental needs.

The bank's latest International Debt Report revealed that total foreign debt interest payments from developing countries skyrocketed to $406 billion, with the greatest pressure on the poorest nations.

Countries eligible for borrowing from the World Bank's International Development Association (IDA) paid an unprecedented $96.2 billion in 2023. Although principal repayments decreased by nearly 8% to $61.6 billion, interest expenses climbed to a record $34.6 billion, quadrupling the amount from a decade earlier.

The World Bank highlighted that on average, IDA-eligible countries now allocate 6% of their export earnings towards foreign debt service—levels unseen since 1999. In some countries, these payments can consume as much as 38% of export earnings.

In a separate report, a banking trade group indicated that the world's total debt stock surged by $12 trillion in the initial three quarters of 2024, reaching a historic high of nearly $323 trillion. The Institute of International Finance also projected that sovereign debt could increase by a third to $130 trillion by 2028 if rising government budget deficits are not curtailed, highlighting growing repayment risks.

By the end of 2023, the external debt for all low- and middle-income countries climbed to a new high of $8.8 trillion, marking an 8% increase since 2020.

This financial strain on the poorest nations has compelled them to seek assistance from multilateral institutions like the World Bank and International Monetary Fund (IMF). According to the World Bank report, these institutions provided $51 billion more in 2022 and 2023 beyond the debt service payments they received.

"Multilateral institutions have become the last lifeline for poor economies attempting to balance debt payments with funding for health, education, and other crucial development priorities," said World Bank Chief Economist Indermit Gill, emphasizing that these institutions weren't designed to serve as lenders of last resort.