According to latest reports, the world debt load has reached an all-time record high of $164 trillion, which could make it harder for countries to respond to the future recession. Vitor Gaspar, head of the International Monetary Fund (IMF) fiscal affairs department, said in an interview, “One hundred and sixty-four trillion is a huge number. When we talk about the risks looming on the horizon, one of the risks has to do with the high level of public and private debt,” reported Bloomberg.
On Wednesday, in its semi-annual Fiscal Monitor report, IMF said the global public and private debt increased to 225% of global gross domestic product in 2016. According to the Washington-based fund, the previous peak was in 2009. As per The Economic Times, the world debt burden clouded the IMF’s otherwise positive outlook of the world economy, which is in its strongest upswing since 2011. On Tuesday, IMF forecast expansion of 3.9% by 2018 and 2019, while in subsequent years the global economy could be affected due to tighter monetary policy and the decreasing US fiscal stimulus.
According to IMF, a fifth of emerging markets and middle-income countries had debt levels above 70% of GDP, led by Brazil at 84% and India at 70.2%. In China, gross government debt stood at 47.8% last year. More than one-third of advanced economies had debt-to-GDP levels above 85%, three times more nations than in 2000. Among them, at 236%, Japan had the highest debt-to-GDP level last year, with Italy at 132% coming in second and the US at 108 %i placing third.
IMF suggests countries should take decisive action to rebuild their fiscal buffers so they can afford to increase spending during hard times. The fund urged the US, whose budget deficit is expected to surpass $1 trillion by 2020, to “recalibrate” its fiscal policy so government debt-to-GDP levels decline over the medium term. In its opinion, the combination of last year’s tax cuts and increased government spending in a recent US budget deal will benefit all income groups. IMF pointed out that those in the top one-fifth of incomes would benefit the most, followed by those in the bottom one-fifth.As a result, the measures may contribute to the further deterioration of middle-class incomes, it said.
A number of low-income countries have racked up so much debt over the last five years, there is now high chance of them not being able to pay it back, which will have potentially devastating consequences not only to their economies but also their citizens, a majority of whom are already living in poverty.
In an interview to NPR, Masood Ahmed, former director of IMF, current president of Washington DC think tank Center for Global Development, says it’s clear some kind of debt restructuring and forgiveness is going to be needed. It will require getting all the creditors to the table to agree on the terms, which is is not an easy thing to do. According to him, it is essential to bring in China and let it play a leadership role.To understand how far and how fast has this problem spread, Ahmed explains that out of the 59 countries the IMF classifies as “low-income developing countries,” 24 are now either in a debt crisis or at high risk of tipping into one. “That’s 40 percent of poor countries,” says Ahmed, “and it’s nearly double the number five years ago.”
According to him, while the amount of debt involved may be crippling to poor countries, for the global economy it’s just a drop in the bucket. In his opinion the current debt crisis is not going to cause a global financial meltdown. So unlike the usual debtors in such financial crisis who benefit from being too big to fail, these nations could find out they are too poor to be able to bail themselves out.