ALARMING STATE OF GLOBAL DEBT AND STAGFLATION
Global debt rose to a record above $305 trillion, while the overall debt-to-output ratio declined. Corporate debt outside banks and government borrowing were the largest sources of the increase in borrowing, with debt outside the financial sector rising above $236 trillion, some $40 trillion higher than two years ago when the COVID-19 pandemic hit.
Debt was already very high before the first coronavirus lockdowns. As the pandemic hit, unprecedented peacetime economic support stabilized financial markets and gradually eased liquidity and credit conditions around the world. In many countries, fiscal policy was able to protect people and firms during the pandemic. It supported monetary policy, too, by adding to aggregate demand and avoiding deflationary dynamics. It all contributed to financial and economic recovery.
Eventually, Inflation rose to new high under low interest regime of central bank across. Sharp increases in energy and food prices are adding to these pressures for the poorest and most vulnerable. Food accounts for up to 60 percent of household consumption in low-income countries. These countries face a unique confluence of factors: dire humanitarian needs intersect with extremely tight financial constraints. For low-income countries that rely on imported fuel and food, the shock may require more grants and highly concessional financing to make ends meet while supporting those households in need. Added to woes, global financial conditions are tightening as major central banks raise interest rates to contain inflation has impacted growth thus job creation declined significantly.
The world facing renewed uncertainty, as war comes on top of an ever-changing and persistent pandemic, now in its third year. Moreover, problems that predated COVID-19 have not gone away. When policymakers return to Washington in the coming days for the Spring Meetings of the IMF and World Bank, one of the central topics will be growing debt vulnerabilities in the world. Now the war in Ukraine is adding risks to unprecedented levels of public borrowing while the pandemic is still straining many government budgets.
Need of the hour
Though Fund continue to help address the root causes of unsafe debt with granular policy advice and capacity-building activities, But, with elevated sovereign debt risks and notable budget and financial constraints, international cooperation to minimize stress during the period ahead will be needed. In cases where liquidity support alone is not enough, policymakers need to take a cooperative approach to ease the debt burdens of the most vulnerable countries, foster greater debt sustainability, and balance the interests of debtors and creditors.
Debt restructurings are likely to become more frequent and will need to address more complex coordination challenges than in the past owing to increased diversity in the creditor landscape. Having mechanisms in place for orderly restructuring is in the best interest of creditors and debtors alike.
For low-income countries, the Debt Service Suspension Initiative expired at the end of 2021. And the Group of Twenty’s Common Framework for Debt Treatments beyond the DSSI has yet to deliver. Improvements are needed. Options should also be explored to help the broader range of emerging and developing economies that are not eligible for the Common Framework.Muddling through will amplify costs and risks to debtors, creditors and, more broadly, global stability and prosperity. In the end, the impact will be most sharply felt by those households that can least afford it.
With sovereign debt risks elevated and financial constraints back at the center of policy concerns, a global cooperative approach is necessary to reach an orderly resolution of debt problems and prevent unnecessary defaults. The views and interests of debtors and creditors must be reflected in a balanced way.
