Photo credit: World Bank

The world’s 26 poorest economies are facing an uphill battle, and it’s getting steeper. These nations, where nearly 40 percent of the population lives on less than $2.15 a day, are now more burdened by debt than at any point since 2006. Add to that the increasing threat of natural disasters and other crises, and it’s clear why these countries are feeling the squeeze. What’s worse, international aid—often a lifeline for such economies—has hit a two-decade low, forcing these nations to turn to high-interest financing just to keep their heads above water.

A recent analysis from the World Bank paints a grim picture: the world’s poorest economies, defined as those with an annual income of less than $1,145 per person, are worse off today than they were before the COVID-19 pandemic, even as much of the rest of the world has rebounded. Government debt in these nations has surged to 72 percent of GDP—an 18-year high. Alarmingly, nearly half of these countries are either already in debt distress or teetering on the edge.

When it comes to attracting low-cost loans or grants, things look bleak. The share of net official development assistance (ODA) in these countries’ GDP fell to just 7 percent in 2022, the lowest in 21 years. This sharp decline has left the World Bank's International Development Association (IDA)—which offers grants and low-interest loans to the world's most vulnerable economies—as the largest source of affordable financing for these nations. In 2022, IDA accounted for almost half of all the development aid received by the 26 poorest economies.

“At a time when much of the world simply backed away from the poorest countries, IDA has been their main lifeline,” said Indermit Gill, the World Bank Group’s Chief Economist. "Over the past five years, IDA has poured most of its resources into keeping these economies afloat amid the historic setbacks they've suffered."

The fallout from the COVID-19 pandemic left a big hole in government budgets across the poorest countries, tripling deficits to 3.4 percent of GDP in 2020. Although the situation has slightly improved, deficits still hover at 2.4 percent of GDP in 2023, nearly three times higher than other developing economies. As a result, government spending has largely been redirected from long-term investments in health, education, and infrastructure to cover urgent needs like paying government workers, debt interest, and subsidies.

Yet, despite the gloomy outlook, these economies are not without potential. They boast abundant natural resources and growing working-age populations, which could be harnessed to drive growth. However, the challenges they face are more severe than most: two-thirds of these economies are either embroiled in conflict or struggle with institutional instability. On top of that, nearly all of them rely on commodity exports, leaving them vulnerable to the boom-and-bust cycles of global markets.

These challenges combine to form a vicious cycle. Wars and conflicts weigh heavily on government finances, often worsening budget deficits by up to 1.5 percentage points of GDP. Likewise, slumps in commodity prices during global economic slowdowns can push up debt levels by about two percentage points of GDP. To make matters worse, these nations are especially susceptible to natural disasters. From 2011 to 2023, they suffered average annual losses equal to 2 percent of GDP due to natural disasters, five times the average loss experienced by lower-middle-income countries.

Climate change is another looming threat, with adaptation costs running about 3.5 percent of GDP each year—five times more than in lower-middle-income countries. Meeting development goals by 2030 will require not just increased investment but a historic level of economic improvement across the board.

“There is much that low-income economies can—and must—do for themselves,” said Ayhan Kose, the World Bank’s Deputy Chief Economist. "They can broaden their tax base and boost the efficiency of public spending. But stronger international support is also crucial, whether through trade and investment cooperation or increased funding for IDA, which has a track record of delivering results and providing affordable financing."

In the end, these 26 economies are stuck in a difficult position. While they have the potential to grow and contribute to global prosperity, the obstacles they face are substantial. More support from the international community will be essential to help them break out of this cycle of poverty and debt, ensuring a path toward sustainable growth and stability.