Debt, Conflict, and Climate: Why the Poorest Nations Need Urgent Global Support

The World Bank’s comprehensive report, authored by economist Joseph Mawejje from the institution’s Prospects Group, in collaboration with research insights from the Economic Policy Research Centre (EPRC) and the Private Sector Foundation in Uganda, lays bare the daunting fiscal landscape confronting the world’s 26 low-income countries (LICs). Representing a mere 0.5 percent of global GDP but home to almost 10 percent of the world’s population and 40 percent of its extreme poor, LICs are under immense pressure. Their development trajectory, already fragile before COVID-19, has been knocked off course by the pandemic, global economic shocks, climate events, and internal conflicts. The fallout has widened income gaps with other developing nations and pushed millions deeper into poverty.

In recent years, government debt in LICs has surged to historic levels. By 2023, the average public debt stood at 72 percent of GDP, rising 9 percentage points in just one year, the steepest increase in over two decades. Interest payments alone now consume more than 10 percent of government revenue. These figures are not just fiscal metrics; they translate into hard choices for governments: between repaying debt or investing in schools, clinics, and infrastructure. The burden is especially crushing given that nearly two-thirds of LICs are classified as fragile and conflict-affected states, facing limited access to capital markets and shrinking concessional financing.

The Revenue Gap That Won’t Close

At the heart of LICs’ fiscal vulnerability is a chronic revenue mobilization problem. These countries collect just 18 percent of GDP in revenues, compared to nearly 29 percent in other emerging market and developing economies (EMDEs). This shortfall stems from several factors: underdeveloped financial systems, low digital adoption in tax administration, and large informal sectors, which account for 37 percent of GDP in LICs. Furthermore, extensive tax exemptions and credits, known as tax expenditures, shave off an additional 2.3 percent of GDP in potential revenue. As the report highlights, many of these policies are poorly targeted, benefitting a narrow elite while draining public coffers.

Adding to the challenge is the shrinking of grant-based financing. A decade ago, grants made up over one-third of total LIC government revenue. Today, that figure has dropped to less than one-fifth. The decline is attributed not only to tightening budgets in donor countries but also to the limited institutional capacity in LICs to absorb and manage aid effectively. This fiscal crunch has led to widening budget deficits and rising dependence on riskier forms of debt, including non-concessional loans from commercial and non-Paris Club lenders.

Wasteful Spending Undermines Development Goals

It is not just about how much LICs spend, but how effectively they do it. According to the report, public spending in LICs is far less efficient than in other EMDEs, largely due to weak institutions, corruption, and poor public investment management. A significant share of budgets goes toward defense, fuel subsidies, and bloated wage bills. For example, fuel subsidies alone cost LICs an average of 2 percent of GDP in 2022, more than their public health spending. Meanwhile, education and health expenditures, both vital for human capital development, are underfunded. Combined, these two sectors receive 2 percentage points less of GDP than in other EMDEs.

The report emphasizes that this misallocation hampers long-term development. It also constrains governments’ ability to respond flexibly to shocks or to invest in critical areas like infrastructure, digitalization, and climate resilience. In fragile and conflict-affected LICs, these pressures are magnified, with defense spending and security costs crowding out social investments. High levels of nondiscretionary spending further restrict the fiscal space available for growth-enhancing programs.

Shocks and Setbacks: Conflict, Climate, and Global Downturns

LICs are especially susceptible to global and domestic shocks, which frequently derail already fragile fiscal frameworks. The report’s event analyses show that global recessions cause average fiscal deficits to widen by 1.7 percent of GDP in the first year alone. Armed conflict events are equally disruptive, leading to deteriorations of up to 1.5 percentage points of GDP. Although the immediate impact of natural disasters on fiscal balances is statistically less evident, the long-term toll is significant, as public debt levels tend to rise and remain elevated in their aftermath.

The fiscal fallout from such shocks is worsened by the absence of adequate buffers. Unlike wealthier economies, LICs lack the fiscal room to implement countercyclical policies. When disaster strikes or commodity prices fall, they are forced to cut essential spending or take on more debt. This cyclical vulnerability perpetuates underdevelopment and increases dependency on external aid and concessional borrowing.

A Path Forward: Reform, Resilience, and Global Cooperation

Despite these challenges, the report identifies a path forward anchored in reform and strategic international support. On the domestic front, the emphasis must be on expanding tax bases, improving compliance, and adopting digital tools for tax administration. Reallocating public spending toward health, education, and infrastructure can yield long-term productivity gains. Credible fiscal rules, medium-term expenditure frameworks, and stabilization funds are needed to bring discipline and predictability to budgetary processes.

However, domestic reform alone is not enough. The global community, led by institutions like the World Bank’s International Development Association (IDA), has a pivotal role. While IDA support to LICs has doubled as a share of gross national income in recent years, overall Official Development Assistance (ODA) is declining. Reversing this trend is vital. International partners must increase concessional financing, provide tailored technical assistance, and collaborate with the private sector to de-risk investment in LICs.

Ultimately, the future of these 26 nations hinges on a delicate balance of internal reform and external solidarity. The stakes could not be higher: without action, nearly half the world’s poorest people risk being permanently locked out of global progress. But with decisive leadership and sustained international support, fiscal stability and inclusive development are still within reach.