World not on verge of debt crisis but should worry about rising borrowing distress

'We should be concerned … but we are not at the footsteps of a debt crisis,' IMF chief says

IMF managing director Kristalina Georgieva, World Bank president Ajay Banga and Saudi Finance Minister Mohammed Al Jadaan attend a panel session in Marrakesh, Morocco. Bloomberg

The world is not on the verge of a full-blown debt crisis, but there should be concern over rising borrowing distress and creditor groups should come together to help low and middle-income countries restructure their debt piles, the managing director of the International Monetary Fund has said.

“We should be concerned … but we are not at the footsteps of a debt crisis,” Kristalina Georgieva told a seminar on the sideline of the IMF and World Bank annual meetings in Marrakesh on Thursday.

“Why we should be concerned? Because over the last years, governments, households [and] businesses had to borrow to sustain their function and debt everywhere has piled up higher.”

Global debt jumped significantly after the coronavirus pandemic, especially in emerging and developing economies.

Most of these nations were already struggling with higher levels of debt and a slower pace of growth. The additional debt from Covid-19 added to their significant economic vulnerabilities.

Last year, global debt hit $235 trillion, about $200 billion higher than 2021 levels, and stayed above its “already high pre-pandemic level”, the IMF said in a report in September.

Total debt stood at 238 per cent of global gross domestic product last year, 9 percentage points higher than in 2019. With global borrowing likely to rise in the medium term, the fund urged governments to take measure to reduce their debt vulnerabilities

Aggregate global debt climbed by $8.3 trillion in the first three months of 2023, the Institute of International Finance said in its Global Debt Monitor report in May.

At almost $305 trillion, it was a shade under the $306 trillion recorded in the first quarter of 2022, the institute added.

The increase marked the second consecutive quarterly jump in global borrowing, following two quarters of sharp decline during rapid monetary policy tightening last year in countries around the world.

Most severely hit are low-income countries, where half are either in distress or near distress, and emerging market economies where about 20 per cent are now in distressed territory, Ms Georgieva told delegates.

Ajay Banga, president of the World Bank, said countries in the sub-Saharan Africa are currently paying 7.6 per cent of their GDP to pay down their debt.

“For comparison, the spend on education and health care together is 5.6 per cent, so 7.6 per cent is a lot, therefore, for the [region],” he said.

However, “the impression that debt is bad” is not correct – the problem is in the handling of the debt “in a form that is not quite realistic, that gets you into real trouble”, he added.

The borrowing burden of developing countries in particular has hit unsustainable levels that require durable solutions including cancellation of the debt piles of some of the poorest nations, the G24 said in a press conference earlier this week in Marrakesh.

The international government group of 24 developing nations also called on the IMF and World Bank to help bring down public debt levels that are stifling growth in some countries.

“We call for immediate global action to assist developing countries to managing their escalating debt vulnerabilities,” said Adama Coulibaly, Ivory Coast’s Minister of Economy and Finance, who is also the chairman of G24.

The G20 common framework that allows lower- and middle-income countries to restructure their debt also calls for the cancellation of debt burden of the poorest and most vulnerable countries. Currently, most of the debt of these nations is owed to multilateral development banks, he said.

Debt restructuring depends on circumstances of each individual country as well as the group of creditors, Saudi Arabia’s Minister of Finance Mohammed Al Jadaan said.

“I think it [the common framework] is working,” he said. “It is frustrating that it's not working better, obviously.”

He added that the global community and lender groups should work with China, which has emerged as one of the biggest lenders in Africa, to help poor nations restructure their debt.

China stepped up when no one else did and lent in Africa when others stayed away, Mr Al Jadaan said, adding that it had built infrastructure that it cannot carry back to China, and so has engaged in lending for its own benefit as well as that of the African people.

“I think we should appreciate that,” he said. “We [should] just work with them. We should just show them love … and try to make the common framework work.”