Last week, the International Monetary Fund (IMF) updated its Global Debt Database, which includes its forecasts on global debt by end of 2021, over its October estimations.
The database showed that global debt had jumped significantly by 28 percent in 2020 to reach $226 trillion, accounting for 256 percent of world’s GDP.
The IMF attributed this surge in global debt to the countries’ need to protect people’s lives, preserve jobs, and avoid a wave of bankruptcies due to the pandemic.
For Egypt, the IMF’s updated database showed that Egypt’s gross public debt to GDP ratio stood at 91.4 percent in 2021, which is the same level the IMF announced in October.
Ahram Online: What are the key drivers of the new surge in the global debt to GDP ratio?
Vitor Gasper: In 2020, the surge in the global debt reflected increases in both public and non-financial private debt. In both cases, it was driven by the global health crisis.
The rise in public debt was primarily caused by fiscal measures to tackle the COVID-19 pandemic, including spending and revenue measures and also a fall in tax revenues due to the large economic contraction. Large fiscal deficits played a major role on debt increases in advanced economies and emerging markets, contributing on average with 9.5 and 7.8 percentage points of GDP, respectively.
Nonetheless, low-income countries have also seen a deterioration in their underlying fiscal positions, albeit to a lesser extent. In that case, the average contribution of primary deficits was about 3.4 percentage points of GDP. Other factors that have contributed to higher debt ratios include exchange rate depreciation effects and fall in nominal GDP.
The global crisis and economic recession also contributed to higher debt-to-GDP ratios in the private sector, especially among non-financial corporations. Many firms had to borrow to survive during the pandemic. In some countries, they were able to borrow thanks to support by governments and central banks.
AO: What does the update to the global debt database show for developing countries and emerging markets?
VG: Country situations vary, but on average emerging markets (excluding China) and low-income countries faced tighter financing conditions than advanced economies during the pandemic, what we call the “great financing divide.”
Nevertheless, in this crisis, debt as share of GDP increased almost everywhere around the World. The economic recession and fall in tax revenues also contributed to a rise in debt vulnerabilities in emerging markets and low-income countries. Total public and private debt in emerging markets (excluding China) reached a record high 137 percent of GDP. In low-income developing countries it jumped to 87 percent of GDP, a ratio not seen since the early-1990s.
The situation is concerning among highly indebted developing economies. About 60 percent of low-income countries are at high risk or already in debt distress, twice as much as the share a few years ago. As the G20 Debt Service Suspension Initiative (DSSI) expires soon, participating countries will be forced to resume debt service payments. Further international support to provide further debt relief will be critical.
AO: When are global debt levels expected to start their downturn?
VG: The large rise in debt was a one-off response to the crisis and we expect debt will fall gradually, although the debt dynamics will vary across countries and depend on the speed of the economic recovery.
Based on the latest projections in the IMF’s Fiscal Monitor of October 2021, public debt as share of GDP is expected to have stabilized already in 2021. Nevertheless, public debt is expected to remain persistently higher than the levels projected before the pandemic. For instance, in advanced economies it is projected to be almost 20 percentage points higher than pre-pandemic through 2026. Higher debt stocks will be associated with higher gross financing.
Last, but not least, it is important to highlight that countries and governments face a highly uncertain and complex environment. The economic recovery and improvement on public finances will depend on pandemic developments, vaccination progress, and how global financing conditions evolve. For developing countries, the scarring effects of the crisis are also expected to be larger. Economies are not expected to go back to pre-crisis trends and tax revenues are also expected to be lower. This will make it harder to achieve the sustainable development goals and manage debt vulnerabilities over the medium term. Another dimension of uncertainty relates to inflation dynamics and their implications for the conduct of monetary policy and financial developments. Uncertainty and complexity are challenges for public debt management.
AO: What about the Middle East’s and North Africa’s debt in 2021 and beyond?
VG: Like elsewhere, public debt burdens in the Middle East and North Africa (MENA) region, which were already high for many countries before the onset of the pandemic, increased further as a result of the COVID-19 crisis. In particular, the generalized widening of fiscal deficits and the contraction of economic output led to an average increase of more than seven percentage points in the public debt-to-GDP ratio in MENA countries between 2019 and 2020. This ratio is projected to decline on average by about five percentage points between 2020 and 2021 as economic activity continues its recovery and fiscal balances gradually improve, reflecting a cyclical recovery in revenues and the expiration of pandemic-related measures. This decline is expected to continue gradually over the medium term, supported by negative interest rate-growth differentials.
Within MENA region, there are significant differences between oil-exporters and oil importers. In particular, the projected decline in the public debt-to-GDP ratio between 2020 and 2021 is driven by the decline among oil exporters, whose fiscal balances have improved significantly as oil prices rise. In contrast, for oil importers, the public debt-to-GDP ratio, which was over two times as high as that for oil exporters in 2020, is expected to continue increasing in 2021 and to decrease thereafter, largely driven by the projected increase in output and the gradual fiscal consolidation after 2021.
AO: For Egypt, the database shows that Egypt’s debt-to-GDP ratio still stands at 91.4 percent compared to October’s data. What can you say about that?
VG: As in other countries, 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 FY21/22 as growth rebounds. A sustained reduction in public debt will require renewed reform momentum to support continued strong growth; a comprehensive structural reform agenda is essential to help foster private sector development and unleash Egypt’s considerable growth potential.
AO: How can Egypt deal with the elevated debt amid the rising inflation and expected increase in the interest rates?
VG: Egypt’s high interest bill and large rollover needs compound the general complexities and uncertainties referred to before. A return to the pre-crisis primary surplus of two percent is expected in FY22/23, which together with stronger growth is expected to anchor a sustained decline in public debt over the medium term. Continued progress in shifting toward longer-term debt issuance will also help reduce gross financing needs and vulnerability to shifts in financing conditions by lowering rollover risks.
AO: Do you think that such risks would hinder Egypt’s medium-term strategy that aims to tame its debt?
VG: Implementation of the medium-term debt strategy is essential to manage the situation resulting from Egypt’s high debt and large gross financing needs, including through efforts to lengthen maturities, broaden the investor base, deepen secondary markets, and facilitate more reliance on long term bond issuance. Improving revenue mobilization as the authorities have embarked on, including through strengthening customs and tax revenue administration, will also help create fiscal space for high-priority spending to support sustainable and inclusive growth while keeping debt on a downward trajectory.