Global debt declined to $235 trillion in 2022 but stayed above pre-Covid level, IMF says

Total debt stood at 238% of global GDP last year as public debt remained stubbornly high

China played a central role in increasing global debt in recent decades as borrowing outpaced economic growth, according to the IMF. Bloomberg

Global debt retreated for the second year in a row to $235 trillion last year, or $200 billion above its level in 2021, according to the International Monetary Fund.

The global debt burden remained above its “already-high pre-pandemic level”, the Washington-based lender said in a new blog post.

Total debt stood at 238 per cent of global gross domestic product last year, nine percentage points higher than in 2019, the report said.

“Policymakers will need to be unwavering over the next few years in their commitment to preserving debt sustainability,” said the blog's co-authors, Vitor Gaspar, director of the IMF’s fiscal affairs department, Marcos Poplawski-Ribeiro, a deputy division chief, and Jiae Yoo, an economist at the fund.

Global debt grew 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, global debt is a shade under the $306 trillion recorded in the first quarter of 2022, the IIF added.

The increase marks 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.

Central banks around the world have eased the pace of increases in their benchmark policy rates that were raised to curb inflation.

After hitting pause on its tightening cycle in June, the Fed in July increased the policy rate for the 11th time since March 2022 by 25 basis points, as it aims to bring inflation down to its 2 per cent target range after prices hit a four-decade high in June 2022. The Fed has now raised rates by a total of 525 bps since March 2022.

The rise in interest rates makes borrowing in US dollars more expensive for governments, corporations and financial institutions, as well as household borrowers.

However, the smaller increases and their slowing pace have encouraged borrowers to take advantage of the window and secure capital.

Despite the economic growth rebound from 2020 and much higher-than-expected inflation, public debt remained stubbornly high last year, according to the IMF.

Fiscal deficits kept public debt levels elevated, as many governments spent more to boost growth and respond to food and energy price spikes even as they ended pandemic-related fiscal support, the lender said.

Public debt declined by just eight percentage points of GDP over the past two years, offsetting only about half of the pandemic-related increase, the IMF’s Global Debt Monitor data showed.

Meanwhile, private debt, which includes household and non-financial corporate debt, declined at a faster clip, dropping 12 percentage points of GDP. Even then, the decline was not enough to erase the pandemic surge, the fund said.

“Before the pandemic, global debt-to-GDP ratios had risen for decades,” the IMF said.

“Global public debt tripled since the mid-1970s to reach 92 per cent of GDP [or just above $91 trillion] by end-2022. Private debt also tripled to 146 per cent of GDP [or close to $144 trillion], but over a longer time span between 1960 and 2022.”

China played a central role in increasing global debt in recent decades as borrowing outpaced economic growth, according to the fund.

China’s debt as a share of GDP has risen to about the same level as in the US. But, in dollar terms, the Asian country’s total debt ($47.5 trillion) is still markedly below that of the US (close to $70 trillion), the IMF data showed.

In terms of non-financial corporate debt, China’s 28 per cent share is the largest in the world.

Debt in low-income developing countries also rose significantly in the past two decades, although from lower initial levels, the IMF blog said.

“Even as their debt levels, especially private debt, remain on average relatively low compared with advanced and emerging economies, the pace of their increases since the global financial crisis has created challenges and vulnerabilities,” it said.

“More than half of low-income developing countries are in or at high risk of debt distress, and about one-fifth of emerging markets have sovereign bonds trading at distressed levels.”

The IMF recommended that governments should take urgent steps to help reduce debt vulnerabilities and reverse long-term debt trends.

For private sector debt, the fund’s policy recommendations include vigilant monitoring of household and non-financial corporate debt burdens and related financial stability risks.

For public debt, building a credible fiscal framework could guide the process to balance spending needs with debt sustainability, the IMF suggested.

Low-income developing countries must focus on improving the capacity to collect additional tax revenue.

For countries with unsustainable debt, the lender recommended a comprehensive approach that encompasses fiscal discipline as well as debt restructuring under the G20 Common Framework.

“Reducing debt burdens will create fiscal space and allow new investments, helping foster economic growth in coming years,” the IMF said.

“Reforms to labour and product markets that boost potential output at the national level would support that goal. International co-operation on taxation, including carbon taxation, could further alleviate pressures on public financing.”