Global debt beats retreat for second year, but worries remain, says IMF

• Down to 238%‭ ‬of global GDP at‭ $‬235trn
• Fear over return of long-term rising trend

The global debt burden retreated for the second year in a row, from 248 percent in 2021 and 258 percent in 2020 to 238 percent of global gross domestic product (GDP) in 2022,  as debt amounted to $235 trillion, underpinned by strong post-pandemic growth which lowered the Covid-19-induced spike in global debt.

But the International Monetary Fund (IMF) has warned that despite the economic growth rebound in the post-pandemic period, there are prospects for global debt returning to its long-term increasing trend with the United States and China being powerful forces accounting for a huge chunk of the global debt.

The IMF, in a recent report titled, “Global Debt is Returning to its Rising Trend”, 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.

Notably, the United States and China accounted for a combined $117.5 trillion in debt, representing 50 percent of the global debt within the period under review.

China’s total debt was placed at $47.5 trillion as borrowing outpaced economic growth and that of the United States estimated at $70 trillion based on the report.

It, however, said that for non-financial corporate debt, China’s 28 percent share is the largest in the world.

The international financial institution 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.

Furthermore, it noted 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. However, 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.

The IMF further warned that unless developing countries improve their tax capacity and revenue mobilisation capacity, they will find it difficult to manage their debt even with a relatively low debt profile.

The report said, “LIDCs, in particular, may face greater challenges in managing debt vulnerabilities even at relatively low debt levels. In 2022, LIDCs spent 23 percent of tax revenues on average just to make interest payments, as their tax revenues have remained stagnant while debt burdens have risen. Improving tax capacity and revenue mobilisation should be a key priority to restore fiscal sustainability.”

According to the IMF, emerging markets and developing economies not only need to reignite growth and secure a full recovery, but they also must manage rising debt and other policy considerations.

The typical first step toward stabilising debt, it advised, is to reduce new borrowing through fiscal consolidation or to decrease the total outstanding through debt restructurings.

Due to the large gap in how well markets function between advanced and developing economies, the IMF explained that there is considerable scope for governments to use market reforms as a policy lever to revitalise growth and reduce debt burdens in developing economies.

“Enacting changes in regulations that aim at improving how markets work, for example by increasing competition or establishing appropriate regulatory frameworks, can boost economic output,” it said.

The IMF, therefore, recommended regulatory changes and other market reforms including lowering barriers to entry in utilities markets, establishing financial supervision and regulatory frameworks, and lowering restrictions on foreign exchange transactions and cross-border capital flows to ease the debt burden challenge.

It also  encouraged countries with unsustainable debt to 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.

The IMF report contends that 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.

In addition, it stated that international cooperation on taxation, including carbon taxation, could further alleviate pressures on public financing.