1 week Ago By Taiwo Hassan
The International Monetary Fund (IMF) has said global public debt has largely been underestimated as it is actually higher than it appears. In a blog released on Tuesday, the global lender said the debt is expected to exceed $100 trillion, or about 93 per cent of global gross domestic product by the end of this year and would approach 100 per cent of GDP by 2030. This is 10 percentage points of GDP above 2019, that is, before the pandemic.
According to IMF, while the picture is not homogeneous— public debt is expected to stabilise or decline for two thirds of countries—the October 2024 Fiscal Monitor shows that future debt levels could be even higher than projected, and much larger fiscal adjustments than currently projected are required to stabilise or reduce it with a high probability. The report argues that countries should confront debt risks now with carefully designed fiscal policies that protect growth and vulnerable households, while taking advantage of the monetary policy easing cycle. “The fiscal outlook of many countries might be worse than expected for three reasons: large spending pressures, optimism bias of debt projections, and sizable unidentified debt.
“Previous IMF research has shown that fiscal discourse across the political spectrum has increasingly tilted toward higher spending. And countries will need to increasingly spend more to cope with aging and healthcare; with the green transition and climate adaptation; and with defense and energy security, due to growing geopolitical tensions. “On the other side, past experience suggests that debt projections tend to underestimate actual outcomes by a sizable margin.
Realised debt-to-GDP ratios five-years ahead can be 10 percentage points of GDP higher than projected on average,” the report added. It pointed out that the Fiscal Monitor presented a novel “debtat-risk” framework linking current macro-financial and political conditions to the entire spectrum of possible future debt outcomes. According to IMF, this approach goes beyond the typical focus on the point estimates of debt forecasts and helps policymakers quantify risks to the debt outlook and identify their sources.
“This framework shows that in a severely adverse scenario global public debt could reach 115 per cent of GDP in three years— nearly 20 percentage points higher than currently projected. “This could be due to several reasons: weaker growth, tighter financing conditions, fiscal slippages, and greater economic and policy uncertainty. “Importantly, countries are increasingly vulnerable to global factors affecting their borrowing costs, including spillovers from greater policy uncertainty in systematically important countries, such as the United States.
“Sizable unidentified debt is another reason for public debt to end up being significantly higher than projected. An analysis of more than 30 countries finds that 40 per cent of unidentified debt stems from contingent liabilities and fiscal risks governments face, of which most are related to losses in state-owned enterprises. Historically, unidentified debt has been large, ranging from 1 to 1.
5 per cent of GDP on average, and it increases sharply during periods of financial stress. “If public debt is higher than it looks, current fiscal efforts are likely smaller than needed. “Fiscal adjustment plays a crucial role in containing debt risks.
With inflation moderating and central banks lowering policy rates, economies are better positioned now to absorb the economic effects of fiscal tightening.”.
