IMF raises red flag as global debt hits $235 trillion

It stood at 238 per cent of global GDP last year as public debt remained stubbornly high

In Summary
  • The lender says policymakers will need to be unwavering over the next few years in their commitment to preserving debt sustainability.
  • Despite the economic growth rebound from 2020 and much higher-than-expected inflation, public debt remained stubbornly high.

The International Monetary Fund (IMF) now wants countries to cut on borrowing as the global debt retreats to a pre-covid high. 

According to the Global Debt Database by IMF, debt retreated for the second year in a row to $235 trillion last year, or $200 billion above its level in 2021.

"The global debt burden remained above its “already-high pre-pandemic level. It stood at 238 per cent of global gross domestic product last year, nine percentage points higher than in 2019,''the Washington-based lender said in a new blog post.

“Policymakers will need to be unwavering over the next few years in their commitment to preserving debt sustainability,” the fund said in a report.

Global debt grew by $8.3 trillion in the first three months of 2023, the Institute of International Finance said in its Global Debt Monitor report in May.

The increase marks the second consecutive quarterly jump in global borrowing, following two quarters of sharp decline during rapid monetary policy tightening last year in countries around the world.

In Kenya, the public debt was updated at Sh10.2 trillion in June, having breached the earlier ceiling of Sh10 trillion. 

The National Treasury data shows the country borrowed the largest amount of money in a single year during President William Ruto’s first year in office amid shortfalls in tax collections and increased repayment obligations.

Gross debt stock climbed Sh1.56 trillion for the financial year ended June. 

Central banks around the world have eased the pace of increases in their benchmark policy rates that were raised to curb inflation. Last month, Kenya retailed the base rate at 10.5 per cent.

After hitting pause on its tightening cycle in June, the Fed in July increased the policy rate for the 11th time since March 2022 by 25 basis points, as it aims to bring inflation down to its two per cent target range after prices hit a four-decade high in June 2022.

The Fed has now raised rates by a total of 525 basis points since March 2022.

The rise in interest rates makes borrowing in US dollars more expensive for governments, corporations and financial institutions, as well as household borrowers.

"The dollar soared against most emerging market and advanced economy currencies over the course of 2022, raising the cost of meeting existing debt obligations — many of which are denominated in the US currency,'' IMF says. 

However, the smaller increases and their slowing pace have encouraged borrowers to take advantage of the window and secure capital.

Despite the economic growth rebound from 2020 and much higher-than-expected inflation, public debt remained stubbornly high last year, according to the IMF.

According to the report, 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, the lender said.

Meanwhile, private debt, which includes household and non-financial corporate debt, declined at a faster clip, dropping 12 per centage points of GDP.

Even then, the decline was not enough to erase the pandemic surge, the fund said.

“Before the pandemic, global debt-to-GDP ratios had risen for decades,” the IMF said.

“Global public debt tripled since the mid-1970s to reach 92 per cent of GDP [or just above $91 trillion] by end-2022. Private debt also tripled to 146 per cent of GDP [or close to $144 trillion], but over a longer time span between 1960 and 2022.”

China played a central role in increasing global debt in recent decades as borrowing outpaced economic growth, according to the fund.

China’s debt as a share of GDP has risen to about the same level as in the US. But, in dollar terms, the Asian country’s total debt ($47.5 trillion) is still markedly below that of the US (close to $70 trillion), the IMF data showed.

In terms of non-financial corporate debt, China’s 28 per cent share is the largest in the world.

Debt in low-income developing countries also rose significantly in the past two decades, although from lower initial levels, the IMF blog said.

“Even as their debt levels, especially private debt, remain on average relatively low compared with advanced and emerging economies, the pace of their increases since the global financial crisis has created challenges and vulnerabilities,” it said.

“More than half of low-income developing countries are in or at high risk of debt distress, and about one-fifth of emerging markets have sovereign bonds trading at distressed levels.”

The IMF recommended that governments should take urgent steps to help reduce debt vulnerabilities and reverse long-term debt trends.

For private sector debt, the fund’s policy recommendations include vigilant monitoring of household and non-financial corporate debt burdens and related financial stability risks.

For public debt, building a credible fiscal framework could guide the process to balance spending needs with debt sustainability, the IMF suggested.

Low-income developing countries must focus on improving the capacity to collect additional tax revenue.

For countries with unsustainable debt, the lender recommended a comprehensive approach that encompasses fiscal discipline as well as debt restructuring under the G20 Common Framework.

“Reducing debt burdens will create fiscal space and allow new investments, helping foster economic growth in coming years,” the IMF said.

“Reforms to labour and product markets that boost potential output at the national level would support that goal. International co-operation on taxation, including carbon taxation, could further alleviate pressures on public financing.”

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