INTERVIEW: Managing elevated debt globally

Doaa A.Moneim , Thursday 14 Oct 2021

On the sidelines of the annual meetings of the International Monetary Fund and the World Bank Group board of directors, Deputy Division Chief in the IMF Fiscal Affairs Department Paulo Medas explained how the world is handling coronavirus-induced debt to Al-Ahram Weekly.


With elevated debt levels being a key consequence of the Covid-19 pandemic, what are the International Monetary Fund’s (IMF) expectations for debt-to-GDP ratios in the developing countries and emerging markets, especially in the Middle East and North Africa (MENA) region over the medium and long terms?

Higher debt levels across the world will be one of the legacies of the Covid-19 pandemic. Public debt jumped in 2020 as countries experienced large economic recessions and took measures to save lives and livelihoods. Among emerging markets, debt is projected to continue to rise from 64 per cent of GDP in 2021 to 70 per cent in 2026. But if we exclude China, debt on average will remain broadly stable at 60 per cent of GDP. In low-income countries, public debt is expected to reach around 50 per cent of GDP in 2021-22 and then decline gradually over time.

The developing countries will face a more challenging environment as the economic recovery is held back by low rates of vaccination against Covid-19 and more limited fiscal support compared to the advanced economies. GDP levels will likely remain persistently at lower levels than pre-pandemic projections, contributing to lower fiscal revenues. Some emerging markets face rising borrowing costs, including due to concerns over inflation or currency depreciation.

Public debt in the MENA region, after rising to 52.5 per cent in 2020, is expected to decline by about four percentage points of GDP in 2021 and stabilise at around 48 per cent of GDP over the medium term. However, the fiscal and debt outlook varies significantly within the region, reflecting factors such as oil prices, growth prospects, and access to financing. Some countries are expected to contain or reduce debt trends thanks to gradual fiscal consolidation or rising oil prices (the oil exporters). Others will face greater challenges to contain debt pressures without further international support.

What is the outlook for Egypt in this regard?

Like in the other countries in the MENA region, the Covid-19 crisis has disrupted the declining trend of Egypt’s debt-to-GDP ratio since 2016-17, but public debt is projected to return to a downward trajectory in the 2021-22 fiscal year as growth rebounds. A return to the pre-crisis primary surplus of two per cent is expected in 2022-23, which together with sustained high growth is expected to anchor a decline in public debt over the medium term to around 75 per cent of GDP in the 2025-26 fiscal year.

However, this outlook remains contingent on renewed reform momentum to support continued strong growth, while high public debt and large gross financing needs leave Egypt vulnerable to changes in financial market conditions for emerging markets as monetary policy in advanced economies begins to normalise.

What procedures do MENA countries need to adopt to set increasing debt-to-GDP ratios on a downward course?

We have to remember the priority is still tackling the pandemic. Many emerging markets and developing countries face tough choices due to higher debt and tighter borrowing constraints than the advanced economies — what we call the financing divide. Governments will need to continue to give priority to health spending, getting all the population vaccinated, and protecting the most vulnerable. Achieving high vaccination rates will allow a faster and stronger recovery, which will also help raise tax revenues and control debt levels.

Governments should also set sound medium-term fiscal plans to ensure debt sustainability. Credible plans will help create fiscal space to fight the pandemic by making it easier to access markets at lower borrowing costs.

In the low-income developing countries, more revenue efforts will be needed to overcome the setbacks from the pandemic and achieve the UN Sustainable Development Goals (SGDs) while ensuring debt sustainability. Mustering the needed resources can be achieved through broadening the base for corporate and personal income taxes (eg by reducing exemptions) and a well-designed menu of taxes, including value-added taxes.

The international community can also help overcome the vaccine and financing divides. The most urgent need is to ensure that vaccines, treatments, and medical supplies are produced and distributed quickly and fairly across all countries. An IMF staff proposal, jointly endorsed by the World Health Organisation (WHO), World Trade Organisation (WTO), and World Bank, provides clear targets and pragmatic actions at feasible cost to end the pandemic.

Many low-income countries will also need further financial aid and debt relief. The IMF has extended $117 billion in new financing and debt-servicing relief to 85 countries, almost triple the levels before the pandemic. The new general Special Drawing Rights (SDRs) allocation of $650 billion, including the voluntary channeling of SDRs, will also help vulnerable countries. The G20 group’s Common Framework for Debt Treatment is a step forward, and the IMF will work closely with the G20 and debtor countries on ensuring it is effective.

How do you perceive Egypt’s medium-term strategy to curb rising debt levels, prepare for the country’s first sovereign sukuk bond issuance, and the new developments in the taxation and customs systems to cope with the debt issue and finance the budget deficit?

The implementation of the medium-term debt strategy is essential to reduce vulnerabilities resulting from Egypt’s high debt and large gross financing needs. The sovereign sukuk issuance, together with the issuance of green bonds and expected inclusion in the JP Morgan Emerging Market Government Bond Index, should help broaden the investor base, deepen secondary markets, and facilitate more reliance on long-term bond issuance. Meanwhile, improving revenue mobilisation, as the authorities have embarked on, including through strengthening customs and tax-revenue administration, will help create the fiscal space for high-priority spending to support sustainable and inclusive growth while keeping debt on a downward trajectory.

The IMF’s Fiscal Monitor Report points to elevated risk related to the global fiscal outlook. What risks are expected for the developing and emerging markets, including Egypt?

The most significant source of risks to the global outlook, in the short term, relates to the evolution of the pandemic. The large vaccine divide amplifies these risks for lower-income countries, which have much lower access to vaccines. A rapid scaling up of vaccination in many emerging markets and low-income developing countries is needed in order to save lives and support the economic recovery, which will also improve fiscal prospects.

Another risk that is especially elevated for developing countries relates to the increasingly tight financial conditions. A sharper and faster rise in global interest rates and lower access to debt markets will make it harder to manage fiscal pressures. This is especially concerning as emerging and low-income countries are expected to face long-term scarring from the pandemic, leading to lower output and government revenue than was expected before Covid-19. Debt vulnerabilities in emerging markets and developing countries are also amplified by their shorter maturity and higher foreign-currency exposure. Half of low-income developing countries are already experiencing, or are at risk of experiencing, debt distress.

International cooperation, including in the form of grants, loans, and debt-relief initiatives such as the effective implementation of the G20 Common Framework, will be crucial to provide valuable financial support to low-income developing countries to help fight the pandemic and support the recovery.

What are your thoughts on monetary policy and the interest rates outlook in Egypt?

The Central Bank of Egypt’s (CBE) data-driven approach to monetary policy has helped achieve low and stable inflation throughout the Covid-19 shock period. Although inflation has picked up in recent months, it remains well within the CBE’s target range for average inflation in the fourth quarter of 2022 and is projected to stabilise at around seven per cent over the medium term.

However, given upside risks to inflation, in particular from rising global commodity prices, the authorities should maintain a data-dependent approach to monetary policy to keep inflation expectations well-anchored. A flexible exchange rate is an important part of the monetary policy framework, and two-sided exchange-rate flexibility is essential to absorb external shocks and maintain external competitiveness. Over the medium term, the CBE should continue to strengthen the monetary policy framework and monetary transmission.

The green transition is a trend that cannot be overlooked. What is the IMF’s estimate of the cost of this in developing countries and the MENA region to 2030 and 2050?

The costs can vary significantly across countries and will depend on how ambitious the objectives are. The policy mix chosen will influence how much overall investment (public plus private) will be needed. For instance, greater reliance on carbon pricing incentivises energy efficiency, which tends to reduce total energy demand and the accumulation of capital. The difference in estimates on investment needs also depends on the degree of the transformation of the energy system.

Past analysis (in the April 2020 Fiscal Monitor Report), for example, estimated that, from 2020 to 2040, an additional investment of 0.6 per cent of global GDP per year was needed for adaptation to climate change as well as the transition to cleaner energy systems in order to limit the rise in global temperatures to below two degrees Celsius in this century compared with preindustrial levels. The cost could be significantly higher for some developing economies. For example, in Africa the need would be 1.1 per cent of GDP per year.

An initial green investment push with a steadily rising carbon tax would deliver the needed emissions reduction at a reasonable transitional global output effect. Namely, a global carbon tax that would gradually rise to around $75 per ton of CO2 in 2030 combining with redistributions, eg to assist low-income households and support disproportionately affected workers or communities would help to finance the costs while ensuring a more equitable transition. 

The international community can help efforts among low-income countries by allocating more aid for climate-change adaptation.

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