Over the past 30 years, low-income countries have gone through major shifts in debt. In the 1990s, many were heavily indebted. Debt relief programmes and stronger economic growth in the 2000s helped reduce these burdens. But since around 2010, borrowing has increased again due to infrastructure spending, global shocks, and the COVID-19 pandemic. While debt levels have recently stabilised, they remain high, raising questions about sustainability.
This means that rising debt is not always a warning sign. In fact, for developing countries, borrowing can help finance growth, build infrastructure, and improve living standards. The key is whether the debt follows a path similar to countries that have successfully avoided financial crises in the past.
Learning from Other Countries’ Experiences
They also used an advanced method known as the synthetic control technique. This creates a “model country” by combining data from several stable economies. This model shows what a safe debt path should look like. By comparing real countries with this model, researchers can see whether a country is on track or moving into risky territory.
External factors also play a role. Rising global interest rates, exchange rate changes, and dependence on natural resources can affect how easily a country can manage its debt. Countries with strong institutions and better financial systems tend to handle these challenges more effectively.
A Mixed Picture for Low-Income Countries
However, the study also finds that the most indebted countries are starting to diverge from these stable patterns. Their debt has grown faster and is moving beyond the range seen in historically stable economies. This signals rising risks and the need for closer monitoring.
The key takeaway is clear. Debt itself is not the enemy. What matters is how countries manage it. With the right policies and strong economic growth, borrowing can support development. But without careful management, it can quickly become a serious problem.
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