Rising levels of global debt a growing concern: IMF official
TOKYO: Global debt is 9 percentage points above pre-pandemic highs at 93 percent of GDP and by 2029 it is projected to reach around 100 percent of GDP, said Kenji Okamura, IMF’s Deputy Managing Director.
IMF’s Deputy Managing Director Kenji Okamura.
Even before COVID-19, rising levels of public debt were a growing concern in many countries. But when the pandemic hit, public debts jumped significantly as governments provided huge amount of fiscal support to households and businesses,” he told the Fiscal Policy and Sovereign Debt Conference in Tokyo.
The conference organized as part of the IMF’s Sovereign Debt Network project, brings together leading scholars and senior policymakers to discuss and share their recent work on fiscal policy and public debt. At the national level, figures are even higher, Okamura said. In the US, China, and Japan respectively, debt-to-GDP ratios are forecast to reach 133, 106 and 251 percent by 2028. Historically, these are levels that have only been seen during wartime.
“High debt at a time of high interest rates means rising debt service costs that constrain fiscal space and the situation is compounded by weak medium term growth prospects,” he said.
Together, these factors mean countries are less able to meet rising spending pressures to address challenges such as climate change and aging populations. It also means they have less flexibility to respond to future crises and safeguard financial stability. And some economies, particularly low-income countries, are already in debt distress.
These challenges raise important questions about fiscal policy and sovereign debt. First, what makes a debt reduction plan sustainable? And how can governments commit to ambitious but credible adjustment plans? Growth can help, but with a significant and broad-based slowdown in productivity, this is less likely in the coming years.
For most countries, reducing debt means making tough choices to curb budget deficits - so building public support for these efforts will be vital.
Talking about the implications of rising public debt levels in large economies such as the United States, he asked if they can generate substantial negative spillovers for the global economy. “US debt levels are expected to grow over the next five years and beyond. This could mean higher for longer interest rates, which can be transmitted internationally through financial channels,” Okamura mentioned.
Risk sentiment could also spill over from financial centers, which would be detrimental to global growth and investment. Taken together, this could render otherwise sustainable fiscal paths in several corners of the world unsustainable. Policymakers must be prepared to address this challenge by strengthening their own fiscal policies and frameworks.
US public debt continues to play a special role as a global safe asset, giving the US government a funding advantage. But this “exorbitant” privileges can be eroded (although this would probably materialize as a slow-moving process), he said.
For emerging market and developing economies, sovereign liquidity risks and default risks are interconnected. Questions of who holds debt, the composition of debt, and debt-carrying capacity are critical.
Understanding how an aging population can influence fiscal outcomes is crucial to be able to help our member countries navigate this challenge. There is no better place to do it than here in Japan, which has been at the leading edge of policy thinking on this issue, he added.
