CAIRO: As governments across the world borrowed more to deal with the pandemic, public debt now accounts for almost 40 percent of the global total — the most in almost six decades, revealed the International Monetary Fund’s annual report.
The world’s overall debt jumped by 28 percentage points to 256 percent of the gross domestic product in 2020, with government borrowing accounting for about half of corporations and households.
“Extraordinary policy support during the pandemic stabilized financial markets and gradually eased liquidity and credit conditions around the world, contributing to the recovery. But deficits increased and debt accumulated much faster than during previous recessions, including the global financial crisis,” the report noted.
This extraordinary situation has led to rising debt vulnerabilities, with potential costs and risks to debtors and creditors, and, broadly, threatening global stability and prosperity.
“The war in Ukraine is adding to the strain on public finances even as countries are still reeling from the pandemic,” said the report.
The IMF noted that current global economic conditions, reflecting slowing growth and rising inflation, caused global tightening of monetary policies which in turn increased sovereign borrowing costs.
This restricted the scope of government spending, thus backing the rise in debt vulnerabilities mainly in emerging markets and developing economies, explained the report.
The Common Framework for Debt was set up in an attempt to address the issue of unsustainable debt by the Group of Twenty and Paris Club in November 2020.
It dealt with “insolvency and protracted liquidity problems in eligible countries by providing debt relief consistent with the debtor’s spending needs and capacity to pay,” stated the report, adding: “Not a single country has achieved restructuring to date.”
In June 2021, the IMF carried out reforms to its debt limits policy to give more space for countries to handle their debt while simultaneously taking precautions toward debt sustainability.
The IMF, together with the World Bank, proceeded to support the G20 DSSI initiative in which debt relief by official creditors became available.
The report noted that the proposal was executed in May 2020 where $12.9 billion worth of debt relief was given to 48 countries and expired in December 2021.
Meanwhile, the Catastrophe Containment and Relief Trust was also set up by the IMF in which 18 members and the EU aided in financing debt relief to its poorest members.
Data from the report disclosed that a total of approximately $927 million worth of debt relief was given by the IMF to its low-income countries.
That being said, the IMF stressed that debt payment remains a challenge in developing countries as interest rates and borrowing costs continue to rise.
“About 60 percent of low-income developing countries are already at high risk of or in debt distress. The economic shocks from the war in Ukraine only add to their challenges,” stated the report.
“Continued support from the international community will be critical for these countries,” the IMF suggested in the report.