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Developing countries pay much higher interest rates on loans – UN Report
The comparison of interest rates in developing countries and developed countries
Kaieteur News – A recently published United Nations (UN) report highlighted that developing countries, like Guyana are the ones who have to pay much higher interest rates when they borrow monies.
The report, ‘A World of Debt: A growing burden to prosperity’ was produced by the UN Global Crisis Response Group and released in July 2023.
Public debt can be vital for development, some Governments use it to finance their expenditures, to protect and invest in their people, and to pave their way to a better future – it was stated in the report. However, it was noted that it can also be a heavy burden.
Explaining the inequalities in the international financial architecture, it was stated that developing countries are dealing with an international financial architecture that exacerbates the negative impact of cascading crises on sustainable development.
Further, it was highlighted that the burden of debt on development is intensified by a system that constrains developing countries access to development finance and pushes them to borrow from more expensive sources, increasing their vulnerabilities and making it even harder to resolve debt crises.
In addition, it was said that when developing countries borrow money, they have to pay much higher interest rates compared to developed countries, even without considering the costs of exchange rate fluctuations.
In the report, a comparison was done for the bond yields (2022-2023) between developing countries and developed countries.
It showed that countries like the United States and Germany had interest rates of 3.1% and 1.5% respectively. Whereas, for developing countries in Asia and Oceania, Latin America and the Caribbean and Africa, those countries had to pay interest rates ranging from 6.5% to 11.6%.
“Countries in Africa borrow on average at rates that are four times higher than those of the United States and even eight times higher than those of Germany,” it was underscored.
To this end, it was said that high borrowing costs make it difficult for developing countries to fund important investments, which in turn further undermines debt sustainability and progress towards sustainable development.
“Developing countries face additional major challenges due to high levels of external public debt, which make them more vulnerable to external shocks. When global financial conditions change or international investors become more risk-averse, borrowing costs can shoot up suddenly,” it was said in the report.
Similarly, it was noted that when a country’s currency devalues, debt payments in foreign currency can skyrocket, leaving less money for development spending.
Notably, last week the National Assembly approved a US$3 Billion hike to Guyana’s domestic public and external debt ceilings.
Senior Minister in the Office of the President with responsibility for Finance, Dr. Ashni Singh – who tabled the motion to raise the debt ceilings – indicated that as Guyana’s ability to borrow more increases the Government will return to the National Assembly to further increase the debt ceilings.
Devoting more money to pay debts
The report said that in Latin America and the Caribbean, developing countries are devoting more money to interest payments rather than to investment. The report noted that across the world, rising debt burdens are keeping countries from investing in sustainable development.
“An increasing number of countries find themselves trapped in a situation where both their development and their ability to manage debt is compromised. Currently at least 19 developing countries are spending more on interest than on education and 45 are spending more on interest than on health. In total, 48 countries are home to 3.3 billion people, whose lives are directly affected by underinvestment in education or health due to large interest payment burdens,” the report added.
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Taking new debts is a double edged sword.
When the economy is growing there is always a need for appropriate investments in physical infrastructure and human development
In Guyana’s context investments in roads, bridges , energy are all important. However that should happen concurrently with human development including:
-Students should be have easy access to higher education , vocational training and meaningful employment opportunities upon graduation;
– Students and other vulnerable segments of the population should easy access to quality health care;
– Students should have ongoing food and financial support till their circumstances improve;
We should look to the best practices in countries such as South Korea and Singapore which took on lots debts but used it for investments in physical infrastructures and its people-human development. Debt in this instance was used to enhance the capacity and capability of the country. Today these are shining examples for us to follow
Alternatively, if debt is not used prudently, we will likely condemn the young and future generations to misery and poverty and 40 year old exodus of its people will continue.
Really we own it to the children to do a better job! Let’s not squander this opportunity!!