Global debt reached record $235 trn in 2021: IMF

Global debt remained above pre-pandemic levels in 2021 even after posting the steepest decline in 70 years, underscoring the challenges for policymakers, IMF’s Vitor Gaspar, Paulo Medas and Roberto Perrelli said in a blog post on its website.

Private debt, which includes non-financial corporate and household obligations, drove the overall reduction, decreasing by 6 percentage points to 153 per cent of GDP. The decline of 4 percentage points for public debt to 96 per cent of GDP was the largest such drop in decades, the IMF database shows.

The unusually large swings in debt ratios are caused by the economic rebound from COVID-19 and the swift rise in inflation that has followed.

Debt dynamics varied significantly across country groups, however. The fall was largest in advanced economies, where both private and public debt fell by 5 per cent of GDP in 2021, reversing almost one-third of the surge recorded in 2020.

In emerging markets (excluding China), the fall in debt ratios in 2021 was equivalent to almost 60 per cent of the 2020 rise, with private debt falling more than public debt.

In low-income developing countries, total debt ratios continued to increase last year, driven by higher private debt.

Three main drivers explain these unusually large movements in both private and public debt around the world: large fluctuations in economic growth; high and more volatile inflation; and effects of economic shocks on the budgets of governments, firms and households.

Managing the high debt levels will become increasingly difficult if the economic outlook continues to deteriorate and borrowings costs rise further, the blog post says. The high inflation levels continue to help reduce debt ratios in 2022, especially where deficits are returning to pre-pandemic levels.

The weaker growth outlook and tighter monetary policy calls for prudence in managing debt and conducting fiscal policy. Recent developments in bond markets show investors’ heightened sensitivity to deteriorating macroeconomic fundamentals and limited fiscal buffers, the post notes.

The blog post suggests governments to adopt fiscal strategies that help reduce inflationary pressures now and debt vulnerabilities over the medium term, including by containing expenditure growth—while protecting priority areas, including support to those hardest hit by the cost-of-living crisis.

Fibre2Fashion News Desk (DS)