Poorest Economies Face Deepening Debt Crisis and Vulnerability Amid Decline in Global Aid, World Bank Warns

New Analysis Highlights Increased Debt Burdens and the Critical Role of the World Bank’s IDA in Supporting Low-Income Economies as Aid Falls to Historic Lows.

The world’s 26 poorest economies, home to nearly 40% of people living on less than $2.15 a day, are facing unprecedented levels of debt and growing vulnerability to shocks such as natural disasters, according to a new analysis from the World Bank. Despite these mounting challenges, international aid as a share of their GDP has dropped to a two-decade low, pushing many of these nations toward punishing financing terms.

This analysis marks the first comprehensive review of the persistent fiscal fragility in the world’s poorest economies—defined as those with annual per capita incomes below $1,145. It reveals that, on average, these nations are poorer today than they were before the COVID-19 pandemic, while the global economy has mostly recovered. Government debt in these countries now averages 72% of GDP, an 18-year high, with nearly half of them in or at high risk of debt distress. Not one is considered at low risk.

A significant factor worsening the financial situation of these countries is the sharp decline in official development assistance (ODA). In 2022, ODA as a share of GDP for low-income economies fell to just 7%, the lowest in 21 years. This reduction in aid has left many of the poorest nations reliant on expensive and less favorable loans, exacerbating their debt challenges. The World Bank’s International Development Association (IDA) has emerged as the single largest provider of low-cost financing for these economies, supplying nearly half of all development aid they received from multilateral organizations in 2022.

“At a time when much of the world stepped back from the poorest countries, IDA has been their main lifeline,” said Indermit Gill, Chief Economist and Senior Vice President for Development Economics at the World Bank. “Over the past five years, IDA has directed most of its financial resources to these 26 low-income economies, helping them navigate historic setbacks. It has supported job creation, child education, healthcare, and access to electricity and clean water.”

However, for these economies to break out of their state of chronic emergency and meet key development goals, the World Bank emphasized the need for unprecedented levels of investment.

Rising Spending Needs and Growing Deficits

The report highlights how the COVID-19 pandemic dramatically increased spending needs in low-income economies, leading to an alarming rise in primary deficits, which tripled to 3.4% of GDP in 2020. While deficits have since decreased slightly to 2.4% of GDP in 2023, they remain nearly three times the average of other developing economies. This fiscal imbalance is forcing governments to shift resources from critical long-term priorities like healthcare and education toward immediate concerns, such as government wages, debt interest payments, and subsidies.

The report underscores that despite these challenges, the 26 poorest economies still have significant potential for growth. They are endowed with ample natural resources and benefit from growing working-age populations, both of which could contribute to broader prosperity and stability. However, these nations also face a unique cluster of challenges, including institutional fragility, social unrest, and an over-reliance on commodity exports, which exposes them to volatile boom-and-bust cycles.

Two-thirds of these economies are either embroiled in conflict or struggle to maintain order due to institutional weaknesses. Wars, in particular, can cause long-term damage to government finances, worsening fiscal balances by as much as 1.5 percentage points of GDP. In addition, downturns in commodity prices—often linked to global recessions—can raise national debt levels by up to two percentage points of GDP.

Vulnerability to Natural Disasters and Climate Change

In addition to economic instability, low-income economies are also more vulnerable to natural disasters than their wealthier counterparts. From 2011 to 2023, these economies experienced average annual losses of 2% of GDP due to natural disasters—five times the rate of losses in lower-middle-income countries. The costs of adapting to climate change are similarly higher for these nations, amounting to 3.5% of GDP annually, another figure that is five times higher than that for lower-middle-income countries.

This combination of risks and vulnerabilities means that low-income economies will need to ramp up investment at an unprecedented pace to achieve global development goals by 2030. Without such acceleration, these nations could be left behind, even as wealthier countries make strides in recovery and growth.

A Path Forward: Broadening Domestic Revenues and Strengthening International Support

According to the World Bank’s Deputy Chief Economist Ayhan Kose, there are steps low-income economies can take to help themselves, including broadening their tax base and improving the efficiency of public spending. Simplifying taxpayer registration and better administration of tax collection can bring more resources into government coffers while cutting inefficiencies could free up funds for vital social services.

However, Kose stressed that the international community must also step up its efforts. “These economies need stronger help from abroad—both in the form of greater international cooperation on trade and investment and much larger support for IDA," he said.

By working with the private sector and mobilizing additional resources, IDA can help low-income economies implement structural reforms necessary for long-term development. IDA’s affordable financing, deep expertise, and sound policy advice have made it a vital development partner for the world’s most vulnerable nations.

“IDA has a successful track record, and with the right level of support, it can continue to be a crucial force in helping low-income economies recover and grow,” Kose concluded.