The International Monetary Fund (IMF), on Wednesday warned that global debt is growing faster and higher than foreseen before the pandemic.
According to Vitor Gaspar, Head of the Fund’s Fiscal Affairs Department, ahead of the launch of the Fiscal Monitor (FM) Wednesday (October 11) in Marrakech, Morocco, noted that while government debt ratios declined in 2021 and 2022, it is on its way up again this year.
At the current rate of about one percentage point a year, said the former Portuguese Finance Minister, “global public debt will be approaching 100% of GDP by the end of the decade,” meaning that the world will have more debt than their current economies are valued.
To tackle this wave of debt, he says governments must seek ways to firm up their balance sheets both by raising revenue, promoting growth and reducing spending.
“Balancing public finances is increasingly challenging due to rising spending demands. Fiscal tightening is necessary in most countries. This is not only to build buffers against future shocks and reduce financial risks, but also to help bring inflation back to parity,” a statement by the fund noted.
An increase in debt, it stressed, “will be particularly challenging for emerging market and developing economies already experiencing high debt and rising interest costs, alongside sizable adaptation needs. These findings reinforce the need for improved expenditure efficiency, revenue mobilization, a greater role for private sector financing, and external financial support alongside knowledge transfers and diffusion.”
The Fiscal Monitor report, published by the IMF twice yearly, looks particularly at how governments can muster investment in reducing the environmental impact of carbon emissions.
“Fiscal Monitor: Climate Crossroads warns that scaling up current policies to achieve Net Zero would lead to unsustainable debt. Maintaining current policies would invite catastrophic failure in achieving Net Zero. The solution lies in a balanced approach, combining carbon pricing and other tools and creating a policy framework that mobilises the private sector.”
The report takes stock of mitigation policies across countries and presents the trilemma facing policymakers of balancing between achieving climate goals, debt sustainability, and political feasibility.
New insights from the report shows that the only way to achieve these joint goals is through a carefully calibrated mix of revenue and spending-based policies. Carbon pricing, though a necessary instrument, the report noted, “is not sufficient and should be complemented by policies to address market failures and catalyze private financing and investment in low-carbon technologies. Robust fiscal transfers are needed to protect vulnerable households, workers, and communities during the green transition,” it stressed.
The fiscal cost of policy mix varies and could become challenging particularly for emerging market and developing economies already experiencing high debt and rising interest costs, alongside large adaptation and development needs, it added, urging countries with limited fiscal space to “build tax capacity to mobilize revenues and improve spending efficiency.
“Policies should encourage the private sector to play an increasing role in financing and investing in climate actions. Global coordination to push forward pragmatic global carbon pricing, enhance external financial support, and facilitate knowledge transfers of established low-carbon technologies are essential to support climate efforts for developing economies.”