The global economy is more deeply indebted than before the financial crisis and countries need to take immediate action to improve their finances before the next downturn, the International Monetary Fund has said.
The IMF said a prolonged period of low interest rates had stimulated a build-up of debt worth 225% of world GDP in 2016, 12 points above the previous record level reached in 2009.
China was responsible for much of the increase, the IMF said, but noted that developed, emerging market and low-income countries all now looked vulnerable.
The Washington-based institution used its half-yearly fiscal monitor to single out the US for particular criticism, saying that Donald Trump’s fiscal stimulus – a package of tax cuts and spending increases – was leading to a bigger budget deficit at a time when it should be on the way down.
Growth in the global economy is expected to be 3.9% in both 2018 and 2019, but the IMF thinks the better-than-predicted performance will not last and that countries that reduce budget deficits now will be best placed when tougher times arrive.
“Decisive action is needed now to strengthen fiscal buffers, taking full advantage of the cyclical upswing in economic activity,” the fund said.
“It is important to note that building buffers now will help protect the economy, both by creating room for fiscal policy to step in to support economic activity during a downturn and by reducing the risk of financing difficulties if global financial conditions tighten suddenly.”
The IMF said the biggest emerging market economy, China, had alone been responsible for more than 40% of the increase in global debt since 2007. It added that debt levels across emerging markets as a whole now averaged 50% of GDP, their highest level since the 1980s, the decade marked by the Latin American debt crisis.
The world’s poorest countries had their debts largely written off as a result of the Gleneagles agreement of 2005, but the IMF said debt-to-GDP ratios were once again on the rise and were now above 40% of GDP. Nearly half of the debt is on non-concessional terms, which has resulted in a doubling of the interest burden as a share of tax revenues in the past 10 years.
Vítor Gaspar, the IMF’s director of fiscal affairs, said that since the debt write-offs, debt levels had been picking up and had risen by 13 percentage points of GDP in the past five years. Many poor countries in Africa borrowed heavily when commodity prices were high only to face difficulties when the market for their exports crashed.
“Our debt sustainability analyses indicate that 40% of low-income countries are currently at high risk of or already in debt distress. It doubled in five years,” Gaspar said.
“Furthermore, debt service has also been rising rapidly, particularly in countries with high inflation rates. The interest burden has also doubled, in the past 10 years, to 20 percent of taxes.”
The World Bank offers low-income countries interest-free or cheap loans, but Gaspar said much of the increase in interest-rate burdens reflected a growing tendency to borrow from the private capital markets.
Gaspar rejected Trump’s argument that the extra growth generated by the US fiscal stimulus will pay for itself.
“These measures will give rise to overall deficits above $1tn over the next three years, which is more than 5% of GDP. Debt is projected to increase from 108% in 2017 to 117% of GDP in 2023. If tax cuts with sunset provisions are not allowed to lapse, public debt would climb even higher.
“We urge policymakers to avoid pro-cyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up.
“The economic upswing should be used to accumulate fiscal buffers for tempestuous times that will eventually come.”
