Debt

The global debt has jumped to a new high of $226 trillion, said the International Monetary Fund (IMF) on October 13, 2021. As reason of this leap in global debt, the IMF has cited the Covid-19 and policies put in place to respond to it.

Global debt in 2020, including public and private borrowing, “jumped by 14 percent to a record high $226 trillion,” according to the IMF’s Fiscal Monitor report. This is the largest increase on record, and far exceeds the $20 trillion cumulative debt gain seen over the two years of the global financial crisis in 2008-2009.

The IMF also estimates that 65 to 75 million more people will fall into poverty by the end of 2021 than would have been the case without the pandemic.

Advanced economies and China contributed more than 90 per cent to the accumulation of worldwide debt in 2020. The remaining emerging economies and low-income developing countries contributed only around seven per cent.

“Because of Covid-19, and of policies put in place to respond to it, debt levels increased fast and reached high levels. High and rising levels of public and private debt are associated with risks to financial stability and public finances,” IMF Director of Fiscal Affairs Department Vitor Gaspar told reporters during a release of the 2021 Fiscal Monitor Report.

“The debt of governments, households and non-financial corporations added up to $226 trillion in 2020 — $27 trillion above 2019. This increase is, by far, the largest on record,” he said. This figure includes both public and non-financial private sector debt.

Constraints on financing are particularly severe for poorer countries, Gasper said. Noting that in 2020, fiscal policy proved its worth, he said the increase in public debt, in 2020, was fully justified by the need to respond to Covid-19 and its economic, social, and financial consequences. But the increase is expected to be one-off, he said. Gasper said debt is expected to decline this year and next — by about 1 percentage point of GDP per year.

The IMF warned of the risk of sudden and steep declines in global equity prices and home values as the Federal Reserve and other central banks withdraw the support they have provided during the pandemic.

After debt loads surged last year amid the pandemic, governments now must take care to “calibrate” spending, the IMF said.

“A significant number of countries are in debt distress, or at high risk of debt distress,” said Vitor Gaspar, director of the IMF’s Fiscal Affairs Department.

It is “urgent” to make progress on a framework to help those countries at risk, he told reporters, repeating the call from the IMF and World Bank to take action before the debt service suspension initiative agreed by the Group of 20 (G-20) expires at the end of the year.

“While recognizing that the international community provided critical support to alleviate fiscal vulnerabilities in low-income countries, more is needed,” he said.

Public Debt

Public debt amounts to $88 trillion, close to 100 percent of GDP, and is expected to decline only gradually, according to the report, but there is a risk excess private debt will become public debt.

“Countries will need to calibrate fiscal policies to their own unique circumstances,” Gaspar said.

Massive public support helped to soften the economic blow from the pandemic, as well as the health impact.

Huge aid packages in the U.S. and Europe “could add a cumulative $4.6 trillion to global GDP between 2021 and 2026 if fully implemented,” Gaspar said.

In advanced economies, with progress on containing the virus, spending is shifting away from the immediate crisis and towards green and digital policies and the effort to “make economies more inclusive.”

For example, U.S. budget proposals “aim to reduce inequality and could cut poverty by nearly one-third,” he noted.

But emerging markets and low-income developing countries “face a more challenging outlook” and “long-lasting negative impacts,” as falling tax revenues due to the ongoing crisis will leave little room for investing in development, he said.

The IMF said that global government debt is estimated at 97.8% of the world’s gross domestic product in 2021.

That is 0.8 percentage points lower than a year before but still at record-high levels as a result of the massive fiscal responses to the Covid-19 pandemic.

Globally, public debt, according to the IMF, is expected to decline by about 1 percentage point of the world’s GDP per year in 2021 and 2022 before stabilizing at about 97% of GDP.

In the coming years debt is “expected to remain persistently higher the than the levels projected before the pandemic – in advanced economies it is projected to be almost 20 percentage points higher through 2026,” the IMF said in its report.

According to its preliminary estimates, global debt issued by governments, nonfinancial corporations, and households in 2020 reached $226 trillion, up $27 trillion from 2019.

Advanced economies and China accounted for more than 90% of the accumulation of worldwide debt in 2020, while remaining emerging markets and low-income developing countries accounted for only around 7%, said the report.


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