Emerging economies are facing a deepening debt crisis exacerbated by persistent global policy uncertainty and rising interest rates, World Bank Chief Economist Indermit Gill warned this week. In remarks delivered on the sidelines of the IMF–World Bank spring meetings in Washington, Gill highlighted that more than half of the roughly 150 low- and middle-income countries tracked by the Bank are either already unable to meet their debt‐service obligations or are on the brink of doing so. He argued that this looming debt distress threatens to derail development gains achieved over the past two decades, and urged governments to reduce their own trade barriers swiftly—a move he says could provide a vital boost to growth and debt sustainability.

Debt Servicing Burden Reaches Two-Decade Highs

Over the past five years, emerging‐market governments have seen their net interest payments as a share of GDP rise sharply, climbing from around 7 percent in 2014 back to levels last seen in the late 1990s. For poorer nations, the burden is even heavier: interest costs now consume nearly 20 percent of GDP, double their share a decade ago. With global growth projected to slow to roughly 2.8 percent in 2025—down half a percentage point from forecasts earlier this year—tax revenues in many developing countries look set to stagnate even as borrowing costs remain elevated.

Local currency bond yields in several major emerging markets have climbed to multi‐year highs, reflecting both higher global policy rates and a risk premium for potential sovereign restructuring. Traders point to unusually large swings in U.S. Treasury yields—driven by tariff‐induced volatility in core markets—as adding fuel to an already difficult financing environment. Central banks from South Africa to Indonesia have flagged that the era of easy external borrowing is over, and that capital inflows are unlikely to return to pre‐pandemic levels without major improvements in policy clarity.

Gill underscored that, unlike past crises spurred by financial market turbulence or pandemics, the current shock has a clear policy origin: widespread tariffs imposed by major economies this spring. While some of the steepest levies have been put on hold, the risk of rapid reinstatement looms large. Fifty percent of respondents in a recent Fed survey named general policy unpredictability as a top vulnerability for financial markets—a signal that public‐sector decisions are now primary drivers of risk. Developing countries, many of which rely heavily on tariff revenues for budget financing, face a painful dilemma: maintaining high import duties to shore up public coffers or lowering rates to stimulate trade and support growth.

In practice, tariff hikes risk choking off the very exports and imports that underpin government revenues and economic activity. Smaller nations, lacking the fiscal space of advanced economies, may see trade volumes drop sharply in response to reciprocal duties. This amplifies deficits and forces governments to borrow more at higher rates, creating a vicious cycle of debt accumulation. Gill noted that global trade growth this year is forecast at just 1.5 percent—down from an 8 percent average in the 2000s—illustrating how swiftly policy shifts can throttle cross‐border commerce.

Investment Flows Dwindle Amid Rising Risks

Foreign direct investment (FDI) and portfolio flows—once reliable stabilizers of emerging‐market financing—have retreated markedly as global investors reassess risk. In the early 2010s, FDI inflows averaged roughly 5 percent of GDP across developing economies; today they hover near 1 percent. Equity and bond fund managers cite concerns over shifting tariff regimes, unpredictable fiscal rules and uneven regulatory enforcement. As a result, many countries that depended on steady inflows to finance infrastructure and social programs are now scrambling to tap more costly official creditors or domestic banks.

Sovereign credit‐rating agencies have taken notice. In recent months, a growing number of emerging‐market issuers have seen their outlooks downgraded or placed on negative watch. Analysts warn that unless debt trajectories stabilize, more nations may lose access to international capital markets altogether, forcing them to rely on short‐term, high‐cost borrowing that further deepens funding gaps.

High debt‐service obligations are crowding out essential public investments. Governments across Africa, Asia and Latin America report that interest payments are consuming the lion’s share of fiscal resources, squeezing budgets for education, healthcare and infrastructure. World Bank data show that in several highly indebted countries, capital spending has fallen to its lowest share of GDP in more than a decade. The economist community cautions that cutting social outlays to preserve debt service can undermine human‐capital accumulation, hampering long‐term growth prospects and widening inequality.

Public protests over austerity measures have already emerged in several nations. In Latin America, populist movements threaten to upend reform agendas, while Asian exporters warn that scaling back industrial incentives—often financed by deficit spending—could erode competitive advantage. Gill cautioned that a failure to address debt sustainability in tandem with inclusive growth strategies risks social and political backlashes that could further destabilize economies.

The Case for Liberalization

Against this bleak backdrop, Gill made a striking call: emerging markets should not wait for external relief, but instead seize the opportunity to lower their own tariffs and liberalize trade policymaking. He argued that unilateral reductions in import duties—even before securing reciprocal concessions—could stimulate domestic competition, reduce input costs for manufacturers and help diversify export markets. Historical World Bank modeling indicates that a modest cut in average tariff rates could boost GDP growth by up to a percentage point in some developing economies, generating additional tax revenues that offset short‐term revenue losses.

Gill emphasized that with advanced‐economy tariff hikes causing global uncertainty, a coordinated push among developing‐country blocs could create new trade corridors less exposed to official duties. He cited rising intra‐South trade flows—gaining momentum this decade—as evidence that South‐South integration can unlock growth when multilateral negotiations stall. The economist noted, for example, that ASEAN members have benefitted from “China+1” supply‐chain diversification, and that formalizing similar pacts with partners in Africa and Latin America could generate resilience against tariff shocks.

Regional Initiatives Gain Traction

Some countries are already responding to Gill’s prescription. In West Africa, the Economic Community of West African States (ECOWAS) is reviewing its common external tariff structure, with proposals to eliminate duties on high‐value manufacturing inputs. East African Community (EAC) members have adopted phased tariff cuts on industrial goods to meet commitments under the African Continental Free Trade Area (AfCFTA), targeting a 90 percent reduction in tariffs over the next five years. In Latin America, the Pacific Alliance has undertaken tariff liberalization on technology components to spur digital‐economy growth, hoping to offset declines in commodity prices.

While these regional agreements fall short of global free‐trade commitments, they demonstrate that even partial liberalization can provide meaningful economic dividends. Private‐sector executives in participating economies report that lower duties on machinery and chemicals have already trimmed manufacturing costs by 5–10 percent, boosting export competitiveness and expanding local value‐added production.

Recognizing that policy reforms alone may not suffice, multilateral institutions are ramping up support for debt restructuring and financing solutions. The IMF and World Bank have co‐sponsored a revamped “Common Framework” playbook, offering technical assistance for countries seeking to renegotiate sovereign liabilities. Early adopters of the new framework include Côte d’Ivoire and Zambia, where negotiations with bilateral and private creditors are underway to extend maturities and reduce interest burdens without outright haircuts.

However, Gill stressed that debt‐treatment initiatives must be paired with growth‐friendly policies—such as trade liberalization—to restore market access and underpin repayment capacity. He urged emerging‐market governments to leverage upcoming G20 fora to press for greater transparency in creditor coordination and to secure technical support for tariff‐reform strategies that mitigate transitional revenue losses.

Balancing Reforms and Stability

As the IMF projects global public debt approaching 100 percent of GDP by 2030, the stakes for emerging markets could not be higher. Gill’s message to national leaders was clear: proactive policy reforms, especially in the trade arena, are critical to avert widespread debt crises and to lay the foundations for sustainable, inclusive growth. He acknowledged that tariff cuts entail short‐run fiscal sacrifices, but maintained that the long‐run benefits—from lower import costs, higher export competitiveness and improved investor confidence—far outweigh the risks.

Central bankers and finance ministers attending the spring meetings echoed his call for greater policy clarity. South Africa’s reserve‐bank governor highlighted the perils of prolonged financing stress, while Latin American finance chiefs urged a coordinated approach to trade and fiscal reforms that preserves social spending priorities. With the global economy navigating choppy waters, emerging‐market policymakers face urgent choices: cling to high duties to fund debt-service payments today, or embrace liberalization that could unlock growth and restore fiscal health tomorrow.

(Adapted from Reuters.com)

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