The International Monetary Fund (IMF) has warned that persistently high debt levels globally will become increasingly difficult to manage if the economic outlook continues to deteriorate and the cost of borrowing rises further.
In a blog on its website, IMF researchers said: “The weaker growth outlook and tighter monetary policy calls for prudence in managing debt and conducting fiscal policy. Recent developments in bond markets show investors’ heightened sensitivity to deteriorating macroeconomic fundamentals and limited fiscal buffers".
The blog noted that global debt remained above pre-pandemic levels in 2021 even after posting the steepest decline in 70 years, underscoring the challenges for policymakers.
Although total public and private debt fell by 10 percentage points from its peak level in 2020, to the equivalent of 247% of global gross domestic product, the researchers noted that it increased in dollar terms, reaching a record $235 trillion.
They explained that the unusually large swings in debt ratios have been caused by the economic rebound from COVID-19 and the swift rise in inflation that has followed.
Nevertheless, global debt remained nearly 19% of GDP above pre-pandemic levels at the end of 2021, posing challenges for policymakers all over the world, they added.
The researchers said three main drivers explain the unusually large movements in both private and public debt around the world:
- Large fluctuations in economic growth
- High and more volatile inflation
- Effects of economic shocks on the budgets of governments, firms, and households
“Governments should adopt fiscal strategies that help reduce inflationary pressures now and debt vulnerabilities over the medium term, including by containing expenditure growth—while protecting priority areas, including support to those hardest hit by the cost-of-living crisis,” the researchers said. “This would also facilitate the work of central banks and allow for smaller increases in interest rates than would otherwise be the case. In times of turbulence and turmoil, confidence in long-run stability is a precious asset.”
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