In a recent report by the International Monetary Fund (IMF), it was revealed that global debt saw a decline for the second consecutive year, settling at $235 trillion in the year 2022. While this marks a decrease of $200 billion compared to 2021, the IMF noted that the global debt burden remained higher than its pre-pandemic levels.
The report highlights that the total global debt reached 238% of the global gross domestic product (GDP) in 2022, which is a notable increase of nine percentage points compared to 2019, just before the pandemic struck.
The IMF, in a blog post authored by Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department, Marcos Poplawski-Ribeiro, Deputy Division Chief, and Jiae Yoo, an economist at the fund, emphasized the importance of policymakers maintaining their commitment to preserving debt sustainability in the coming years.
Earlier in 2023, the Institute of International Finance (IIF) reported that global debt had increased by $8.3 trillion in the first three months of the year, bringing the total to nearly $305 trillion. This was slightly lower than the $306 trillion recorded in the first quarter of 2022. Notably, this increase followed two quarters of sharp declines during a period of rapid monetary policy tightening worldwide.
Central banks globally have eased the pace of raising their benchmark policy rates, which were initially increased to combat inflation. For instance, the Federal Reserve (Fed) in the United States paused its tightening cycle in June but increased the policy rate by 25 basis points in July. This marked the 11th rate hike since March 2022, with a total increase of 525 basis points since that time. Rising interest rates have made borrowing in U.S. dollars more costly for governments, corporations, financial institutions, and households. However, the slower rate increases have encouraged borrowers to secure capital.
The IMF also noted that fiscal deficits have contributed to keeping public debt levels elevated. Many governments increased spending to stimulate economic growth and respond to spikes in food and energy prices, even as pandemic-related fiscal support measures were phased out. Public debt only declined by eight percentage points of GDP over the past two years, offsetting just half of the pandemic-related increase.
On the other hand, private debt, which includes household and non-financial corporate debt, declined at a faster rate, dropping by 12 percentage points of GDP. Nevertheless, this decline was insufficient to erase the surge in debt seen during the pandemic.
The IMF highlighted that global debt-to-GDP ratios had been rising for decades before the pandemic, with global public debt tripling since the mid-1970s and private debt tripling between 1960 and 2022. China played a significant role in the global debt increase in recent decades due to borrowing outpacing economic growth. While China’s debt as a percentage of GDP is now similar to that of the United States, its total debt in dollars remains lower.
The IMF also expressed concerns about debt in low-income developing countries, which has risen significantly over the past two decades. While these countries initially had lower debt levels, the pace of their debt increases since the global financial crisis has created challenges and vulnerabilities. Over half of low-income developing countries are either in or at high risk of debt distress, and approximately one-fifth of emerging markets have sovereign bonds trading at distressed levels.
To address these challenges, the IMF recommended various measures. For private sector debt, vigilant monitoring of household and non-financial corporate debt burdens and associated financial stability risks is essential. For public debt, building a credible fiscal framework that balances spending needs with debt sustainability is crucial. Low-income developing countries should focus on improving their capacity to collect additional tax revenue.
For countries with unsustainable debt, the IMF recommended a comprehensive approach, including fiscal discipline and debt restructuring under the G20 Common Framework. Reducing debt burdens can create fiscal space for new investments, supporting economic growth in the years to come. Additionally, reforms in labor and product markets and international cooperation on taxation, including carbon taxation, can help alleviate pressure on public financing.
In conclusion, the IMF’s report highlights the challenges posed by global debt levels and the need for coordinated efforts to ensure debt sustainability and foster economic growth in the face of evolving economic conditions.
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