International debt rose to a record $226 trillion in 2020 as the world economy was blasted by the unrelenting Covid-19 pandemic. The pandemic caused massive economic waves around the world and is responsible for a deep recession according to the International Monetary Fund (IMF).
Global debt rose by 28 percentage points to 256 per cent of gross domestic product (GDP) in 2020. The represented the largest one-year debt surge since World War Two. Vitor Gaspar, who is director of the IMF’s Fiscal Affairs Department claimed the above on his blog, citing figures from the IMF’s latest Global Debt Database.
Meanwhile, private debt rose at a more moderate pace from 164 to 178 per cent of GDP in the same period, according to the IMF.
The IMF officials noted that a crucial challenge for policymakers is to “strike the right mix of fiscal and monetary policies in an environment of high debt and rising inflation”, as the debt surge amplifies vulnerabilities.
“The risks will be magnified if global interest rates rise faster than expected and growth falters. A significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms,” they said.
The IMF officials suggested that some countries, especially those with high gross financing needs or exposure to exchange rate volatility, may need to adjust faster to preserve market confidence and prevent more disruptive fiscal distress.
In addition, the pandemic and the global financing divide demand strong, effective international cooperation and support to developing countries, they noted.
Some International Debt Collection Agencies have also reported a rise in enquiries from UK Importers. Debts varying from a few hundred pounds through to a debt for £80m were just some of the enquiries received by UK International Debt Collection experts Federal Management.
International Debt Collection has been a valuable asset to many cross border traders over the years. Minimising the cost of recovering international debt for British companies.
Difficult balancing act
The large increase in debt was justified by the need to protect people’s lives, preserve jobs, and avoid a wave of bankruptcies. If governments had not taken action, the social and economic consequences would have been devastating.
But the debt surge amplifies vulnerabilities, especially as financing conditions tighten. High debt levels constrain, in most cases, the ability of governments to support the recovery and the capacity of the private sector to invest in the medium term.
A crucial challenge is to strike the right mix of fiscal and monetary policies in an environment of high debt and rising inflation. Fiscal and monetary policies fortunately complemented each other during the worst of the pandemic. Central bank actions, especially in advanced economies, pushed interest rates down to their limit and made it easier for governments to borrow.
Monetary policy is now appropriately shifting focus to rising inflation and inflation expectations. While an increase in inflation, and nominal GDP, helps reduce debt ratios in some cases, this is unlikely to sustain a significant decline in debt.
As central banks raise interest rates to prevent persistently high inflation, borrowing costs rise. In many emerging markets, policy rates have already increased and further rises are expected. Central banks are also planning to reduce their large purchases of government debt and other assets in advanced economies—but how this reduction is carried out will have implications for the economic recovery and fiscal policy.
As interest rates rise, fiscal policy will need to adjust, especially in countries with higher debt vulnerabilities. As history shows, fiscal support will become less effective when interest rates respond—that is, higher spending (or lower taxes) will have less impact on economic activity and employment and could fuel inflation pressures. Debt sustainability concerns are likely to intensify.
The risks will be magnified if global interest rates rise faster than expected and growth falters. A significant tightening of financial conditions would heighten the pressure on the most highly indebted governments, households, and firms. If the public and private sectors are forced to deleverage simultaneously, growth prospects will suffer.
The uncertain outlook and heightened vulnerabilities make it critical to achieve the right balance between policy flexibility, nimble adjustment to changing circumstances, and commitment to credible and sustainable medium-term fiscal plans. Such a strategy would both reduce debt vulnerabilities and facilitate the work of central banks to contain inflation.