Interest rates weigh on poor countries

Interest rates weigh on poor countries

The directors of World Bank and of International Monetary Fund Wednesday warned that interest rate hikes are weighing Poor countries just as they are facing the coronavirus pandemic and inflationary pressures.

There is “a huge accumulation of debt, especially in the poorest countries”, the president of World Bank, David Malpass. “As interest rates rise, debt pressures increase on developing countries and we urgently need to find solutions.”

Malpass said that “the debt crisis” is one of the issues addressed in the so-called spring meetings that are taking place this week between World Bank and the IMF, which was already dominated by sad issues like the war in Ukraine, the coronavirus pandemic and the slow global economy.

IMF chief Kristalina Georgieva said Wednesday that 60% of low-income countries are in a “debt crisis,” meaning their debt payments are equal to half the value of their national economies.

Countries that can barely pay their creditors will not be able to help citizens most in need at a time when the war in Ukraine disrupts food shipments and drives up food prices.

Several countries around the world have gone into debt to finance their national response to the pandemic and to cushion the economic crises caused by collective confinement.

The IMF estimates that, in low-income countries, debt payments will exceed 50% of their gross domestic product this year, up from 44% in 2019.

Massive international economic assistance has taken effect, triggering an unexpectedly rapid recovery from the 2020 recession.

However, the recovery took businesses by surprise and sudden consumer demand caused bottlenecks in factories, ports and loading sites. Shipping has slowed and prices have gone up.

The IMF expects consumer prices to rise by 8.7% this year in developing countries and by 5.7% in developed countries, the highest figures since 1984.

World central banks have responded to this dilemma by raising interest rates in order to ward off inflation, but rate hikes will exacerbate the debt burden, particularly in Poor countries.

As rates rise in the US, they will likely attract investors there, away from the Poor countries. This could depress the currencies of least favored countries and force them to pay more for food and other imported products.

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