Post Views: 313 A new report Global Debt Database, by the International Monetary Fund (IMF) wants nations across the globe to put in place automatic s...
A new report Global Debt Database, by the International Monetary Fund (IMF) wants nations across the globe to put in place automatic stabilizers like tax and spending that move in sync with output and employment to operate fully.
These, it said, should be complimented with driving down deficits and debts towards medium-term targets, lamenting the rising global public and private sector debt conundrum.
The report titled: IMF Fiscal Monitor: Capitalizing on Good Times, drew attention to global debts now at a historic $164tr in 2016, representing 225% of world GDP and representing 12% more than the previous 2009 peak. Global debt, unlike in 2009, the IMF noted, is driven this time by China, which accounted for 43% of the increase.
While global debt level stood at $116tr 2007, China’s debt level soared from just $5tr at the time to $26tr in 2016, representing a 420% leap over the period.
According to the IMF, “public debt plays an important role in the surge in global debt, reflecting the economic collapse during the global financial crisis and the policy response, as well as the effects of the 2014 fall in commodity prices and rapid spending growth in the case of emerging markets and low-income developing countries.”
Debt in advanced economies, the report added, is at 105% of GDP on average, levels not seen since World War II, while that of emerging market and middle-income economies, is close to 50% of GDP, levels last seen during the 1980s debt crisis.
For low-income developing countries, average debt-to-GDP ratios have been climbing at a rapid pace and exceed 40% as of 2017, nearly half of which is on non-concessional terms. This has expectedly resulted in a doubling of the interest burden as a share of tax revenues in the past 10 years.
“Underpinning debt dynamics for all countries are large primary deficits, which reached
record levels in the case of emerging market and developing economies,” expressing concern over the high government debt and deficits.
“Countries with elevated government debt are vulnerable to a sudden tightening of global financing conditions, which could disrupt market access and put economic activity in jeopardy.
“Moreover, experience shows that countries can be subject to large, unexpected shocks to public debt-to-GDP ratios, which would exacerbate rollover risks. It is important to note that large debt and deficits hinder governments’ ability to implement a strong fiscal policy response to support the economy in the event of a downturn.
“Historical experience shows that a weak fiscal position increases the depth and duration of recession—such as in the aftermath of a financial crisis—because governments are unable to deploy sufficient fiscal policy to support growth.”
Building fiscal room to manoeuver, the IMF stressed, is especially relevant now that private sector debt is at record highs and rising, drawing attention to excessive private debt in some countries that puts them at risk of an abrupt and costly deleveraging process.
The report called for decisive action “to strengthen fiscal buffers, taking full advantage of the cyclical upswing in economic activity,” helping to protect the economy, both by creating room for fiscal policy to step in to support economic activity during a downturn and by reducing the risk of financing difficulties if global financial conditions tighten
According to the executive summary of the report, the IMF urged all countries “to keep their sights on policies to lift their medium-term growth outlook.
“Indeed, recent fiscal adjustment in some countries has not necessarily prioritized growth-friendly measures, as illustrated by the decline in public investment spending as a share of GDP among advanced economies and commodity exporters.
“Advanced economies should focus on seeking efficiency gains in spending and rationalizing entitlements to make room for more public investment, incentives for labor market participation, and improvements in the quality of education and health services. Some advanced economies would also benefit from broadening tax bases and upgrading the design of their tax systems.”
It urged emerging market and developing economies, to prioritize raising revenue for financing “critical spending on physical and human capital and social spending. All countries should promote inclusive growth to avoid excessive inequality that can impede social mobility, erode social cohesion, and ultimately hurt growth.”