Global debt declines 238% to $235trn but IMF warns it may return to long-term rising trend

By Onome Amuge.

The global debt burden retreated for the second consecutive year in 2022, dropping 10 percentage points to 238 per cent of global gross domestic product (GDP) in 2022,  as debt amounted to $235 trillion. But the International Monetary Fund has warned that there are prospects for global debt pointing to a return to its long-term increasing trend with China as a powerful force driving it.

The IMF ‘Global Debt Database’ report explained that the fall in global debt in the last two years which reversed about 2/3 of the 2020 surge in debt was driven by  the rebound in economic activity, after a sharp contraction in the early stages of the pandemic, and massive inflation surprises.

The report showed that private debt drove the overall decline last year, especially in advanced economies and in several emerging market economies, while debt in some countries including China and many low-income developing countries kept rising.

However, the report found that despite the economic growth rebound from 2020 and much higher-than-expected inflation, public debt remained stubbornly high, as it stood $200 billion above its level in 2021.

It noted further that fiscal deficits kept public debt levels elevated, as many governments spent more to boost growth and respond to food and energy price spikes even as they ended pandemic-related fiscal support.

As a result, public debt declined by just eight percentage points of GDP over the last two years, offsetting only about half of the pandemic-related increase, while private debt, which includes household and non-financial corporate debt, declined at a faster pace, dropping 12 percentage points of GDP. But then, the decline was not enough to erase the pandemic surge.

“After three years of riding a rollercoaster, the prospects for global debt point to a return to its long-term increasing with China as a powerful force driving it,” the report stated.

Against this backdrop,the IMF urged policymakers on the need to stay unwavering over the next few years in their commitment to preserving debt sustainability.

Governments were also advised to take urgent steps to help reduce debt vulnerabilities and reverse long-term debt trends.

“For private sector debt, those policies could include vigilant monitoring of household and non-financial corporate debt burdens and related financial stability risks. For public debt vulnerabilities, building a credible fiscal framework could guide the process to balance spending needs with debt sustainability,” the IMF said.

For low-income developing countries,the IMF  recommended improving the capacity to collect additional tax revenues is key to debt sustainability.

It also suggested that countries with unsustainable debt apply a comprehensive approach that encompasses fiscal discipline as well as debt restructuring under the ‘Group of Twenty Common Framework’, considered the multilateral mechanism for forgiving and restructuring sovereign debt, when applicable.

According to the IMF, reducing debt burdens will create fiscal space and allow new investments, helping foster economic growth in coming years, noting that reforms to labour and product markets that boost potential output at the national level would support the goal.

The report also noted that international cooperation on taxation, including carbon taxation, could further alleviate pressures on public financing.