The collateral damage of rising interest rates


G20 countries are increasing interest rates to control domestic inflation. The spillover effects risk fuelling a global sovereign debt crisis and are making investments in climate and economic growth increasingly unaffordable, especially in more vulnerable countries.

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The less money you have, the more it costs to borrow

The G20’s chief remit is the health of the global economy. In the face of a global cost of living crisis, getting inflation under control is currently at the top of their list. But rich countries’ actions to control domestic inflation are creating unsustainable economic realities for low-income countries. High interest rates will lock them out of low-cost financing options and create an increasingly divergent global economy and exacerbate an already dangerous debt crisis.  

These rises in rates will make borrowing and debt increasingly unsustainable for many countries. That lack of financing is felt hardest by the people living in low- and middle-income countries. But it has serious long-term consequences globally as well: it prevents much-needed investment in the climate, economic, and development solutions of the future. 

Analysis by the ONE Campaign shows:

  • Borrowing from capital markets is costing African governments 500% what it could if G20 leaders delivered swiftly on financial reform.
  • In the coming years, African countries will pay an additional US$56 billion on the expensive debt they raised from capital markets over five years to 2021. This is compared to what they would pay if they had borrowed from the World Bank instead.
  • For all middle-income countries globally, this amounts to US$74 billion in additional unnecessary costs for new bonds issued just in 2021. 
  • If average interest rates on bonds increase by 1% more, interest would cost an additional US$2.5 billion for African countries and US$27 billion for middle-income countries from debt taken in 2021 alone.
  • G20 leaders could unlock up to US$1 trillion in low-cost lending by 2030 through a combination of policy decisions and new finance including tripling MDBs financing.1 This was recommended by their own expert group, but leaders need to act urgently.

This is generating real-time costs that could worsen the debt crisis and increase poverty. It’s also creating opportunity costs: low- and middle-income countries can’t finance investment in the climate and development solutions that they – and the rest of the world – desperately need.

Thankfully, multilateral development banks (MDBs) like the World Bank were created for exactly this reason: to provide cheaper long-term finance to the countries that need it most. But MDBs need to be bigger and better. G20 leaders hold the keys to this. They could commit to triple the World Bank’s loans and grants by 2030, something the G20’s own independent expert group in 2023 recommended

These reforms would unlock hundreds of billions in new finance — a transformative step at a time that requires urgency. 

Read our recommendations on how G20 countries can deliver this here.

Unprecedented interest rate hikes risk driving a big divergence in the global economy

The pandemic shut down economies in previously unimaginable ways. In response, G20 countries spent US$14 trillion in massive stimulus packages. 

And they worked. Economies on the brink of recession fired back up, but that also fired up inflation. That inflation was not temporary, as many – including the US Federal Reserve – had expected. Since the pandemic started, inflation peaked globally at 10.4% in September 2022 and in Africa at 19.8% in July 2021.

Inflation is currently 7.2% (December 2023) globally and 17.4% in Africa (December 2023).

In response, central banks have implemented the fastest tightening of monetary policy since the 1980s, trying to catch up on an initially slow response. Critically, this includes the US Federal Reserve. 

Increasing interest rates is a tool to cut inflation. But it’s a blunt and often painful one. 

What does this mean for the rest of the world? 

US interest rates functionally drive global rates,  so the consequences of US rate hikes are felt acutely in countries far from those making the decisions. Countries will be paying more for their debt for years.

Higher US interest rates also strengthen the US dollar, which causes many other currencies to depreciate. From January 2022 to March 2023, African currencies lost 8% of their value, increasing their debt by 10% of GDP and pushing up the cost of imports. 80% of external debt in low- and middle-income countries is held in US dollars. So recent interest rate hikes have served as a one-two punch for lower-income countries, triggering inflation and currency depreciation, which has compounded budget and inflationary problems. 

A solution for countries that need transformational finance

Countries currently have little choice but to absorb the extra cost and make painful tradeoffs with social spending and transformational investments. If capital were more affordable, they would not have to make these impossible choices. 

MDBs were set up for this very purpose: to provide capital at much more affordable rates. And they could be doing a lot more.

That matters because MDBs, including the World Bank, are much cheaper than the markets. A significant share of the World Bank’s lending through its concessional arm, the International Development Association (IDA), carries an interest rate of 0.75%. Even the Bank’s non-concessional arm offers much cheaper lending to African countries.

While the World Bank is the largest MDB, regional banks also offer preferential loan rates. The African Development Bank, for example, lent to African countries at a rate of 1.2% in 2021—nearly five times cheaper than government bonds.

These might seem like small numbers, but they make a huge difference. 

The World Bank lent to African countries at an average rate of 1.14% in 2021 through its International Bank for Reconstruction and Development.

The average rate of bonds for African countries in 2021 was 5.78%.

In 2021, African countries borrowed US$23.6 billion from bond markets.

African countries will pay US$13.8 billion in interest over the lifetime of 2021 bonds (that is just one year’s worth of new debt).

If they had borrowed at the rates they borrow from the World Bank, they would have to pay US$2.7 billion instead. That means US$11 billion in additional interest payments for new borrowing in a single year.

African countries will pay US$56 billion in additional interest over the lifetime of loans contracted in the five years to 2021, compared to the costs of borrowing at World Bank IBRD rates.

For middle-income countries, which hold much more commercial debt, the contrast is even starker.

The World Bank lent US$30.3 billion to middle-income countries at an average rate of 1.1% in 2021 (through the IBRD). The average rate of the US$246 billion in bonds for these countries was 4%.

Middle-income countries will pay US$102.5 billion in interest over the lifetime of 2021 bonds.

If the same money had been borrowed at World Bank rates, these countries would instead pay US$28.4 billion in interest. That’s a difference of US$74 billion in additional interest payments.

Middle-income countries will pay over US$350 billion in additional interest over the lifetime of loans contracted in the five years to 2021, compared to the costs of borrowing at World Bank IBRD rates.

You can explore the data and variables yourself in the chart below. You can look at different country groupings, compare with different creditors, and explore how changing the discount rate changes the numbers. You can also change the interest rate and see how much more a higher rate would have cost over the last 5 years. For example, if you select middle-income countries, for bondholders as the creditor, an increase of 1% in the interest to 5% would have increased repayment costs by over US$25 billion in 2021. 

People in vulnerable countries are paying the immediate price of expensive debt

Since 2000, governments in low- and middle-income countries have faced huge financing needs and – until recently – historically low interest rates. So they did the logical thing: they borrowed. In the decade to 2021, Africa debt stocks grew by 250% to US$645 billion with more and more of that debt in the form of market bonds as countries took finance where it was available. 

But that came with a price: greater exposure to market changes, sometimes biassed risk assessments, and higher costs.

Africa’s financing landscape is very different from the 1990’s

Those costs have a direct human impact. As interest rates and the cost of interest repayments rise, social spending goes down, particularly in low-income countries

  • In April 2023, Kenya delayed paying salaries for civil servants, rather than default on a Eurobond payment. 
  • Ghana cut the budget allocation for health by nearly half as the cost to service its debts has surged. That left 41,000 nurses unemployed, despite a serious healthcare worker shortage. 
  • Angola cut its social protection budget by 17% in 2019, with debt service costs consuming 60% of its 2020 budget.
  • Women are the de facto shock absorbers for these economic crises, taking up the burden of unpaid care work the state cannot provide.
  • Defaulting carries high costs. Zambia defaulted in 2021, which is projected to increase infant mortality by more than 3,000 deaths per year by 2030.
  • If Africa’s 13 most debt vulnerable low-income countries defaulted on their debt, 16 million people could be pushed into poverty.  

The long term costs will be borne by everyone, everywhere

These high costs mean that African countries cannot invest for the future. In addition to decreased health and social spending, that means they cannot harness their considerable resources to deliver climate solutions.

Countries still have huge financing needs to tackle their biggest immediate challenges. 

Failing to learn the lessons from the pandemic?

Just for health, the costs of not investing are evident, and huge gaps remain. 

  • COVID-19 pushed 70 million people into extreme poverty in 2020, and the IMF estimated that the pandemic would cost the global economy over US$22 trillion by 2025. 
  • Countries should spend at least 5% of GDP on health, but no low-income country and only six lower-middle income countries meet this target. 
  • The US$10.5 billion in additional international financing needed annually for pandemic preparedness and response investment over the next five years is far from assured. 

But instead of investing in collective future health security, spending will be further squeezed by rising cost of interest rates in low and middle-income countries. 

Africa has huge untapped potential to power the climate transition

In addition to much-needed investment in human development and welfare, Africa’s potential to support global climate response requires access to affordable capital. The carbon budget for our planet to stay below the dangerous 1.5°C tipping point will be depleted in under six years. Already extreme weather events — heat waves across Europe, devastating floods in Nigeria and Pakistan, wildfires in North America — are causing havoc and costing trillions of dollars. 

Africa has huge untapped potential that, if harnessed, could transform it into a global leader in the energy transition. Its rainforests absorb more carbon than the Amazon. It has 71% of the world’s cobalt, a key mineral in electric vehicle batteries and carbon capture installations. And it has the world’s youngest population, with the potential, ideas, and labour to drive the clean energy transition. 

But the high costs of borrowing threaten the investments needed to transform that potential into reality. In 2021, loans to enable solar farms in Europe would have incurred an interest rate of 4%. A similar investment in a solar farm in South Africa would have incurred a rate of at least 10% (and possibly as high as 18%). When borrowing is that expensive, logical and necessary investments become commercially unviable. 

The world at a crossroads

We face an increasingly stark and urgent choice.

If we choose to stick to the path we are on today, we face a future with growing poverty and rising inequality on an increasingly unliveable planet. This path leaves all of us more vulnerable to new health threats, climate shocks, and increasing threats from instability and insecurity. And people living in poverty will be the most impacted.

Or we can choose a different path and respond to these generational challenges with the scale of investment and ambition needed to secure a safer, more stable, and sustainable future for both people and planet. 

Choosing the latter path would help stem the tide of economic decline and unlock Africa’s potential to help provide global solutions to the climate crisis. Unleashing this potential will require addressing unfair and unaffordable debt and increasing the availability of cheaper finance that allows countries to invest in transformative solutions. 

How do we Fund the Future?

Faced with a choice between lose-lose or win-win, G20 leaders must take action to provide countries with much needed low-cost financing. This means reforming our out of date global financing institutions so they are better, bigger, and more responsive to countries’ needs. They should start by dramatically increasing the multilateral development bank system, in particular our largest MDB, committing to triple World Bank loans and grants by 2030

Here are the next steps to make that happen:

  1. The World Bank should make bolder investments and more efficient use of IBRD’s existing capital. Optimising its balance sheet, known as capital adequacy framework reform, would maximise potential financing while preserving its financial stability and AAA credit rating.
  2. After these reforms have made substantial progress, starting with the World Bank, G20 governments must further increase the MDBs’ lending capacity through a capital increase to properly meet the challenges of today.
  3. G20 leaders and World Bank shareholders should commit to triple the World Bank IDA through increasing donor contributions and implementing reforms to further leverage its resources.
  4. G20 leaders and MDB shareholders should implement the G20 Independent Expert Group recommendations to improve the MDB system and ensure that MDBs move faster, more efficiently, and are driven by country needs.

Methodology and additional resources

This notebook contains a detailed overview of our methodology and data. It covers how we have used data from the International Debt Statistics database to calculate the difference in the cost of debt between bondholders and the World Bank IBRD.

For replication code, including access to raw data and the data that powers the different visualisations, please visit this report’s GitHub repository.

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