IMF calls for balance in cutting debt as world now owes $226trn 

As global public debt ratio jumped to a record 99 percent of gross domestic product (GDP) in 2020, the International Monetary Fund says policymakers must strike the right balance in the face of high debt and rising inflation, while national governments must now navigate a world of record-high public and private debt levels and new virus mutations.

The latest update of the IMF’s global debt database shows that global debt rose by 28 percentage points to 256 percent of GDP, in 2020 to $226 trillion as the world was hit by a global health crisis and a deep recession. The fund said during the reported period, government borrowings accounted for slightly more than half of the increase, as the global public debt ratio jumped to a record 99 percent of GDP, while private debt from non-financial corporations and households also reached new highs.

The IMF in the report further stated that the increases in debt are particularly striking in developed climes where public debt rose from around 70 percent of GDP, in 2007, to 124 percent of GDP, in 2020, while private debt, on the other hand, rose at a more moderate pace from 164 to 178 percent of GDP, in the same period.

However, public debt now accounts for almost 40 percent of total global debt, the highest share since the mid-1960s, the IMF revealed, adding that the accumulation of public debt since 2007 is largely attributable to the two major economic crises governments have faced, the financial crisis of 2009 and the COVID-19 pandemic.

In the case of Nigeria, its total public debt printed at about $85 billion (N32.2 trillion) a year ago, but has now shot up by 18 percent to $92.6 billion or N38.01 trillion, in just 12 months, amidst the sale of $4 billion Eurobond in September 2021.

But it is no surprise that emerging markets, including Nigeria and other low-income developing countries, are faced with much tougher financing constraints. Thus, the IMF said these economies, excluding China, which accounted for small shares of the rise in global debt, around $1 trillion to $1.2 trillion each, mainly due to higher public debt.

It further noted that both emerging markets and low-income countries are also facing elevated debt ratios driven by the large fall in nominal GDP in 2020.

With public debt in emerging markets reaching record highs, while in low-income countries it rose to levels not seen since the early 2000s, when many were benefiting from debt relief initiatives.

“The large increase in debt was justified by the need to protect people’s lives, preserve jobs, and avoid a wave of bankruptcies. If governments had not taken action, the social and economic consequences would have been devastating. But the debt surge amplifies vulnerabilities, especially as financing conditions tighten. High debt levels constrain, in most cases, the ability of governments to support the recovery and the capacity of the private sector to invest in the medium term,” the IMF asserted.

While fiscal and monetary policies, fortunately, complemented each other during the worst times of the pandemic, one major and crucial challenge is to strike the right mix of fiscal and monetary policies in an environment of high debt and rising inflation levels.

To this, the IMF recalled how actions of various central banks, especially in advanced economies, pushed interest rates down to their limit and brought about easier routes for governments to borrow.

The fund also noted that while an increase in inflation, nominal GDP may help reduce debt ratios in some cases, it says it is unlikely to sustain a significant decline in debt. Also, as several central banks increased rates to prevent the continued expansion in inflation, the cost of borrowing (interest rates) increased.

The report also opined that now that central banks are already planning to reduce their large purchases of government debt and other assets in advanced economies, how this reduction of large purchases will be executed will have implications for the economic recovery and fiscal policy.

Furthermore, the IMF noted that as the cost of borrowing rises, fiscal policy will need to adjust, especially in countries with higher debt vulnerabilities, though the concerns of debt sustainability are likely to intensify.

It also said the risk thereof, will be magnified if global interest rates rise faster than expected and growth falters, while also highlighting that significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms as the prospect for growth will suffer if the public and private sectors are forced to simultaneously deleverage.

On the uncertain outlook and heightened vulnerabilities, the Fund noted that it will be critical to achieving the right balance between policy flexibility, nimble adjustment to the changing circumstances and commitment to credible and sustainable medium-term fiscal plans. It said this strategy would help reduce debt vulnerabilities and also facilitate efforts of central banks to rein in on inflation while targeted fiscal support will play a crucial role to protect the vulnerable.

The IMF recommended that countries with high gross financing needs (rollover risks) or exposure to exchange rate volatility may need to adjust faster to preserve market confidence and prevent more disruptive fiscal distress as the pandemic and the global financing divide demand strong, effective international cooperation and support to developing countries.