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IMF says global debt hit a record $164 trillion

May 29, 2018
India had the second highest debt, after Brazil, in the Emerging Market and Middle-Income Economies category. But the figure is projected to steadily go down here on, from 68.9 per cent this year to 61.4 per cent by 2023.
IMF says global debt hit a record $164 trillion in 2016; India praised for 'right policies'. The world is drowning in debt like never before. According to the IMF, global debt, public and private alike, hit a record $164 trillion in 2016 - almost 225 per cent of the world's economic output - up 8 per cent from 2015. Debt-to-GDP ratios in the advanced economies are at levels not seen since World War II, while the same for emerging market and middle-income countries have hit levels last seen during the 1980s debt crisis. To ram home the bad news, "the world is now 12 per cent of GDP deeper in debt than the previous peak in 2009", as the latest Fiscal Monitor report put it.
According to Vitor Gaspar, Director, IMF Fiscal Affairs Department, which prepared the report, most of the global debt is in advanced economies, at 105 per cent of GDP on average. But in the past decade, emerging market economies have been responsible for most of the increase. Debt-to-GDP ratios for the latter in 2017 reached almost 50 per cent and are expected to continue on an upward trend. "One-fifth of emerging market and middle-income economies had debt above 70 per cent of GDP in 2017, similar to levels in the early 2000s in the aftermath of the Asian financial crisis. Among low-income developing countries, 20 per cent now boast debt above 60 per cent of GDP, compared with almost none in 2012," said the report.
"Underpinning debt dynamics for all countries are large primary deficits, which reached record levels in the case of emerging market and developing economies," it added. Here's why high government debt and deficits are cause for concern:
It can make countries vulnerable to a sudden tightening of global financing conditions, which could disrupt market access and put economic activity in jeopardy. Past experience shows that countries can be subject to large unexpected shocks to public debt-to-GDP levels, which would exacerbate rollover risk. Furthermore, IMF has previously established that fiscal risks can be highly correlated with each other, with a distinct bunching of contingent liability realizations during crisis periods.
It can hinder a government's 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.
Arguably, high debt can also result in lower growth because it can crowd out private investment and create uncertainty about higher future distortionary taxation.
India praised for 'right policies'
Against this backdrop consider that as per IMF data, India's general government debt (as a percentage of GDP) has been pegged at 70.2 per cent for 2017, up 2 per cent since 2012. In fact, it boasted the second highest debt, after Brazil, in the Emerging Market and Middle-Income Economies category. But the figure is projected to steadily go down here on, from 68.9 per cent this year to 61.4 per cent by 2023. "The debt level is relatively high, but the authorities are planning to bring it down over the medium term with the right policies," said Abdel Senhadji, Deputy Director, IMF Fiscal Affairs Department, at a press conference, adding that India is planning to continue with the consolidation in the current fiscal year and over the medium term. According to the IMF, India's debt ratio projection for 2023, along with a fiscal deficit target of 3 per cent by 2019-20, "are appropriate".
China slammed
In contrast, China's government debt to GDP ratio stood much lower at 47.8 per cent in 2017. However, the IMF report holds the country responsible for a whopping 43 per cent of the global debt increase since 2007, calling it "a driving force". The main concern "has to do with the level and pace of accumulation of overall debt, private and public. So, the control over the debt level - in particular, the rhythm of debt accumulation - is a major challenge for the Chinese economy," said Gasper. According to IMF data, China's general government debt (as a percentage of GDP) is expected to balloon from 47.8 per cent in 2017 to 65.5 per cent by 2023.
Dismal outlook for the US
The projections for the US are similarly dismal. "In the US, the revised tax code and the two-year budget agreement provide additional fiscal stimulus to the economy. These measures will give rise to overall deficit above $1 trillion over the next three years, and that corresponds to more than 5 per cent of the US GDP," said Gasper, adding, "Debt is projected to increase from 108 per cent in 2017 to 117 per cent of GDP in 2023. If tax cuts with sunset provisions are not allowed to lapse, public debt would climb even higher."
Thankfully, the outlook for the world at large is a lot more positive - the IMF forecasts indicate that debt-to-GDP ratios would come down over the next three to five years in most countries. This, of course, hinges on them delivering fully on their policy commitments. So the report calls out for immediate decisive action on the part of nations to strengthen fiscal buffers and advance policies/reforms to reduce vulnerabilities, taking full advantage of the recent broad-based pickup in economic activity. "Countries are advised to avoid procyclical fiscal policies that exacerbate economic fluctuations and ratchet up public debt," said Gasper.
Incidentally, the report also gives a thumbs up to Aadhaar, the constitutional validity of which is currently being debated in the Supreme Court. "Digitalization can improve financial management and ultimately the efficiency of public spending... Biometric technology to identify and authenticate individuals can help reduce leakages and improve coverage of social programs. With more than 1.2 billion registered citizens in India's biometric identification system, Aadhaar, the country stands out as a leader in this area," it said. Significantly, the IMF also underscored that digitization is no panacea, and the report made clear that "governments must address multiple political, social, and institutional weakness and manage digital risks".
Source -BusinessToday

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