The rise in interest rates set by central banks worldwide tends to produce higher returns, especially in North American and Western markets. This shift benefits banks and can lead to tighter consumer and government finances in less wealthy countries. This conclusion comes from recent work by the International Labour Organization and discussions among G20 participants earlier this year.
Higher rates push up the cost of money, enabling banks to charge more in fees and to secure greater profits. In Spain, for example, a major bank reported its strongest annual profit in 15 years, rising 34 percent last year. Thanks to higher rates and reduced loan loss provisions, Spanish companies received 19,430 million euros.
The rate environment also allows banks to extract more fees from individuals and from governments that owe money, which shifts resources toward debt servicing and away from other public investments.
The ILO cautions that this debt burden narrows the public sector’s room to respond to price shocks and the ongoing effects of the pandemic. Its latest report highlights that highly indebted emerging economies face the largest impact from the higher cost of money, presenting two sides of the same coin.
Take the Mozambican case involving a Swiss bank with near one billion dollars in bonds and syndicated loans. Reports note that the state used funds to finance the tuna industry and strengthen maritime security, with some loans scrutinized by U.S. and U.K. authorities due to concerns that interest earnings may have flowed to the accounts of bank executives and Mozambican officials.
As a result, the Swiss bank faced consequences including settlements and debt forgiveness obligations tied to its dealings with Mozambique, reflecting how global oversight intersects with the cost of money and sovereign finance.
job gap
Public debt among major economies accounts for a large share of the world economy, with estimates near the 96 percent mark of global GDP according to the Global Debt Monitor data from 2021.
Countries end up with tighter budgets because more resources go toward debt service rather than growth-friendly policies. The ILO notes that higher indebtedness correlates with larger gaps in employment, meaning people either cannot find work or are not counted as employed under the latest definitions.
A clear question arises about what constitutes the employment gap. It includes formal unemployment defined by those without jobs who are actively seeking work and those who could work but are not actively looking for reasons such as caregiving responsibilities. In debt-ridden economies, the gap tends to be wider than in lower-debt peers.
ILO data show that the employment gap in debtor countries hovers around a quarter of the labor force, compared with a bit more than ten percent in low-debt nations. This divergence has widened during multiple crises, with women experiencing higher barriers to employment than men in many cases.
The IMF notes that a substantial portion of governments worldwide report restrictions in policy responses as labor markets deteriorate, reinforcing the need for prudent economic strategies.
ILO calls for better pensions
The ILO has revisited unemployment projections for 2023 in light of the evolving global picture. In advanced economies, prospects show gradual improvement, while the peripheral regions and those with fewer resources face a tougher trajectory. The agency expects a return to pre-pandemic employment levels in many areas during 2023.
Slower job creation in poorer regions continues even as working-age populations grow. This dynamic pushes more people to consider migration to Europe, the United States, and other destinations in search of opportunity.
To address these challenges, the ILO advocates stronger education systems and more robust social protection. Ensuring adequate pensions helps support the elderly and tends to influence family planning decisions, since reliable benefits reduce the need for large families to provide care in old age.