The pandemic has led to unprecedented increases in government debt. This is one of the weaknesses of the global economy that the International Monetary Fund (IMF) pointed out on Tuesday when it updated its outlook for the coming years. “Fiscally, many countries’ room for maneuver has already been eroded by Covid-19-related spending constraints. The debt burden has risen significantly as exceptional budget support is expected to be withdrawn in 2022-23.”notes Pierre-Olivier Gourinchas, the IMF’s research director, who fears that “The war in Ukraine and the rising interest rates looming around the world will further reduce fiscal capacity in many countries, especially developed and emerging countries that import oil and food”†
Downgrade global growth
As a result, this accumulation of not only sovereign debt, but also private debt is making the global economic recovery today more uncertain and testing the resilience of the financial system, estimates the Fund, which has revised its growth forecasts downwards. % in 2022 and 2023. So far, the IMF forecast an increase of 4.4% this year and 3.8% next year.
Indeed, the war in Ukraine will make it more difficult for many emerging market governments to repay their debts to foreign creditors, fueling fears of potential crises. With inflation already high, sanctions imposed on Russia by Western countries have pushed the prices of food, energy and other commodities up at a time when many major central banks are raising interest rates. Even before the invasion of Ukraine, food prices had skyrocketed, as can be seen the FAO index, which reached a record high in February.
Today, countries like Pakistan, Egypt, Tunisia and Argentina are on the brink of a social explosion due to rising commodity prices weighing on the poorest households.
The example of Sri Lanka
following the example of Sri Lanka, sinking into a serious crisisafter he failed to repay his foreign debt. He asked for emergency financial assistance from the IMF and imposed fuel quotas to stem social anger. The Ministry of Finance justified its late payment due to the war in Ukraine that comes on top of the pandemic. Tourism, a vital sector for the country’s economy and revenue for the state, has been unable to restart.
“Defects are to be expected. There will be crises. With shocks like this (the war in Ukraine), toff is possible”warned Kenneth Rogoff, an economist at Harvard University who specializes in sovereign debt, during a recent roundtable with the IMF.
Although the institution does not foresee a global debt crisis at this stage, the risk is high. “According to the IMF’s Global Debt Database, borrowing rose 28 percentage points to 256% of gross domestic product in 2020 from this increase, with the rest coming from non-financial corporations and households. Public debt now represents nearly 40% of total global debt, an interest rate that has not been reached for nearly sixty years.”Vitor Gaspar and Ceyla Pazarbasioglu reported on the IMF blog last week.
Because, unlike the developed economies that still benefit from low interest rates, emerging countries are finding it increasingly difficult to manage their debt. About 60% of low-income countries were already at high risk of debt crisis in 2020, up from 30% in 2015, according to the IMF, with the risk of default and debt restructuring.
In addition, many emerging economies have borrowed from China to fund themselves. For example, the share of the Asian giant’s foreign debt owed to the 73 most indebted countries of the poorest countries has risen from 2% in 2006 to 18% in 2020. (see chart), while credit to the private sector increased from 3% to 11%, according to IMF data. Meanwhile, the combined share of traditional creditors – multilateral institutions such as the IMF and World Bank or even the “Paris Club” of predominantly wealthy Western governments – fell from 83% to 58% in the same time.
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Integrate a form of resilience
Faced with this growing uncertainty, Kenneth Rogoff, in an article written last month for the IMF, warned about the policy to be pursued, especially in terms of fighting inflation: “Today, the most important macroeconomic lesson we need to learn is that policymakers (not to mention academic economists) in devising responses to the latest major economic shock, be it the financial crisis, the pandemic or the war is in Europe, remember that while things generally get better after a catastrophic event, they can also get worse, so monetary and fiscal policy must build in some form of resilience and not settle for maximalist policies that have recently has come into fashion”† A criticism aimed in particular at the Fed or the Central Bank of England.
