US and China are sending global debt to record, IMF warns

The IMF forecast the world’s ratio of debt to gross domestic product will climb to 99.6% by 2028. — Reuters

WASHINGTON: The United States, China and other major economies need to do more to address debt levels that are set to rise to near-record highs in five years, limiting nations’ ability to respond to future crises, the International Monetary Fund (IMF) warns.

The IMF forecast the world’s ratio of debt to gross domestic product will climb to 99.6% by 2028.

This will almost be matching the level seen in 2020 when governments took on the largest increase in collective debt since World War II to buoy their economies in the face of the output loss from Covid-19 lockdowns.

The world’s debt burden is growing again after shrinking in 2021 and 2022 thanks to inflation and a rapid recovery in growth in the United States and other advanced economies, IMF Fiscal Affairs Department director Vitor Gaspar said.

“Going forward, public debt is not only elevated higher than what was projected before the pandemic, it’s also increasing faster than what was projected before the pandemic,” Gaspar said in an interview.

Looming recession

That, he said, puts the global economy on the wrong path in the face of rising short-term fears over a looming recession and credit crunch caused by a banking crisis.

“You need to rebuild fiscal buffers, because you need to be in a position to face adverse developments, be it economic or financial,” Gaspar said.

Beyond those short-term risks, governments also need to be in a strong fiscal position to face long-run challenges such as climate change, the needed transformation to green energy and worsening demographic trends, he said.

Despite the ominous debt path predicted ahead, Gaspar said the IMF still believed that fiscal policymakers had taken the right approach in 2020 by spending liberally in response to the spread of Covid-19.

“It was crucial in the face of a pandemic, a great shutdown,” he said. “To go big was absolutely correct.”

Steps that governments can take to speedily narrow fiscal gaps include curbing support for energy prices, IMF Fiscal Affairs Department deputy director Paolo Mauro told reporters Wednesday.

“Make that support much more targeted, only to those who truly need support – and that would pretty quickly reduce the deficit and be more efficient,” Mauro said.

Fuelling debt increase

The United States and China – the world’s two biggest economies – are almost entirely fuelling the predicted debt increase, the IMF said.

The US ratio of debt to gross domestic product (GDP) is set to increase to 136.2% in 2028 from 121.7% in 2022.

China’s debt is forecast to soar to 104.9% of GDP in the next five years from 77.1% in 2022 as spending increases and the economy expands less than projected prior to the pandemic.

Brazil, Japan, South Africa, Turkey and the United Kingdom all are also expected to see increases in their debt load of more than 5% of GDP, Gaspar said.

Without the rising debt loads in the United States and China, the world would be on a path to a modest debt reduction.

While many advanced economies can afford the rising costs of servicing debt, the same isn’t true in low-income countries, about 60% of which are now in debt distress or at imminent risk of it, according to the IMF.

Rather than any reductions in their debt loads and debt servicing costs over the past two years, many poor countries have seen the opposite.

That is largely a result of rising interest rates and the impact of a stronger dollar, which in a number of countries more than offset the positive effects of a suspension in debt payments meant to help offset the impact of the pandemic.

The IMF and World Bank have been leading calls for creditors including China, now the largest bilateral creditor to emerging-market nations, to quickly agree to restructurings for poor countries that need it.

Those efforts are caught in a standoff between western creditors and China over the terms of any debt relief, and it’s unclear how much progress will be made on resolving that standoff during this week’s IMF and World Bank meetings in Washington. — Bloomberg

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