Debt is not a new problem. Four years ago, the International Monetary Fund’s (IMF) Fiscal Monitor calculated that total nonfinancial debt amounted to US$ 152 trillion, or 225 percent of world GDP; public debt had increased by 15 percentage points of GDP between 2000 and 2015. IMF First Deputy Managing Director Geoffrey Okamoto in his remarks at Peterson Institute for International Economics Conference, stressed that resolving global debt is an urgent collective action. “As the pandemic raged throughout the world, debt turned out to be a very serious pre-existing condition.”
All countries he said face the same crushing combination, higher spending to fight the disease and protect people and lower revenue because of the recession triggered by all necessary containment measures.
According to Fund, compared to pre-pandemic expectations, median debt in 2021 is projected to be up by about 17 percent of GDP in advanced economies; 12 percent in emerging economies; and 8 percent in low-income-countries. “It’s an alarming rise. With fewer resources and less capacity, Low-Income Countries are particularly vulnerable: about half of them were already in, or at high risk of, debt distress prior to the crisis onslaught” Okamoto said.
On global support, the world he said has managed to avoid a systemic debt crisis, mostly for two reasons firstly due to very low interest rates and massive monetary policy support. “Central banks throughout the world lowered interest rates and supplied liquidity. Swap lines quickly established, helped many emerging countries maintain market access. Our latest estimation is that these measures add up to US$ 7.3 trillion.”
Similarly, he mentioned the extraordinary direct financial support, including IMF emergency financing to 76 countries and debt service relief to the most vulnerable economies through the G20 Debt Service Suspension Initiative (DSSI, to 44 countries) and the IMF’s Catastrophe Containment and Relief Trust (to 29 members).
This support he added has bought the world some time. “We ought to use it wisely. A pandemic-induced systemic debt crisis cannot be ruled out. The longer the problem is postponed, the worse it will become.”
“Countries will continue to need support” said Okamoto. The DSSI, temporary by design, needs to be extended, ideally for another 12 months. Otherwise, recipient countries he said will be forced to resume debt service at the expense of fighting the pandemic and its economic fallout. “This would increase the human suffering and make a recovery even harder.”
Tackle debt vulnerabilities now, Okamoto warned. At the same time, countries with unsustainable debts should not delay restructuring and open negotiations with creditors before the situation worsens. Delaying only increases the costs both economic and human.
The DSSI extension should create incentives for recipient countries with unsustainable debt to tackle it promptly. For example, the extension duration could be linked to an IMF program designed to reduce these vulnerabilities—including by restructuring them if needed.
By Zainab Iyamide Joaque