World Bank Tokyo Online Morning Seminar #204, “Fiscal Vulnerabilities in Low-income Countries: Evolutions, Drivers and Policies”

The world’s 26 poorest economies—home to about 40 percent of all people who live on less than $2.15 a day—are deeper in debt than at any time since 2006 and increasingly vulnerable to natural disasters and other shocks, new analysis from the World Bank shows. Yet international aid as a share of their GDP has dwindled to a two-decade low, forcing many to obtain financing on punishing terms.

The analysis constitutes the first systematic assessment of the causes of chronic fiscal weakness in the very poorest economies—those with annual per capita incomes of less than $1,145 a year. It finds that these economies are poorer today on average than they were on the eve of COVID-19, even though the rest of the world has largely recovered. Government debt, on average, now stands at 72 percent of GDP, an 18-year high. Nearly half of these economies—twice the number in 2015—are either in debt distress or at high risk of it. Not one of them is at low risk.

Low-income economies’ ability to attract low-cost financing, meanwhile, has largely dried up: net official development assistance as a share of GDP fell to a 21-year low of 7 percent in 2022, the latest year for which data are available. That has left the World Bank’s International Development Association (IDA) as their single-largest source of low-cost financing from abroad. IDA provides grants and near-zero-interest-rate loans to 77 of the world’s most vulnerable economies, and it is crucial to the 26 poorest among them: in 2022, IDA alone provided nearly half of all the development aid that these low-income economies received from multilateral organizations.