The International Monetary Fund called on governments to be cautious as they borrow more money to cushion their economies from the blow of the Covid-19 pandemic.
Public debt is now more than 100 per cent of global gross domestic product and has surpassed the record level it reached at the end of the Second World War, according to Vitor Gaspar, director of the fund’s fiscal affairs department, and Gita Gopinath, chief economist.
“The need for continued fiscal support is clear, but this begs the question of how countries can finance it without debt becoming unsustainable,” the IMF executives said in a blog post.
Fiscal deficits this year are expected to be more than five times higher in advanced economies and probably more than double in emerging market economies.
This is a jump in public debt of 26 percentage and seven percentage points of GDP, respectively, relative to the fund's World Economic Outlook forecasts in January.
Governments will benefit from borrowing costs that are at historical lows and projected to “stay that way for a long time”.
This allows for the continuity of fiscal responses as policymakers look to strengthen health infrastructure, stem job losses, save smaller businesses and stave off larger bankruptcies.
The pandemic, which forced governments to close borders and shut all but essential businesses, has taken a heavy toll on the world's economy, pushing it into its deepest recession since the Great Depression.
In June, the IMF forecast that the world economy would contract by 4.9 per cent this year, down 1.9 percentage points from its April forecast, before staging a sluggish recovery next year to grow by 5.4 per cent.
Two thirds of governments topped up their fiscal support to offset the effects of the pandemic, pumping about $11 trillion (Dh40.4tn) into their economies, compared to $8tn in April.
The fund projects a cumulative loss to the global economy of more than $12tn in 2020 and 2021 as a result of the virus. Although most economies have begun reopening, the rate of infection is still on the rise in the US, Brazil and India.
The virus has infected more than 12.7 million people worldwide and killed more than 567,000, with the US accounting for about 26 per cent of infections worldwide, according to Johns Hopkins University, which is tracking the outbreak.
The IMF executives said while “caution is advised” on public borrowing, “the top priority is still public health”.
“While the trajectory of public debt could drift up further in an adverse scenario, an earlier-than-warranted fiscal retrenchment presents an even greater risk of derailing the recovery, with larger future fiscal costs,” Mr Gaspar and Ms Gopinath said.
The IMF said that global public debt – excluding the US and China – is expected to stabilise next year, spurred by low interest rates and an economic rebound.
Borrowing costs, however, could increase rapidly, particularly for emerging economies and frontier markets, as was the case in March. Countries that entered the crisis with high debt and low economic growth will need to find a way back to sustainable fiscal balances, the fund said.
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“The need for fiscal action does not end here, as we are not out of the woods,” Mr Gaspar and Ms Gopinath said.
“Even as many countries tentatively exit the Great Lockdown, in the absence of a solution to the health crisis, huge uncertainties remain about the path of the recovery.”
The fund said the international community must ensure vulnerable developing countries that lack the resources to support healthcare systems are given access to concessional financing and, in some cases, grants.
The IMF has so far extended emergency assistance to more than 70 countries battling the pandemic. The fund said poorer nations may require additional debt relief, including through the G20 debt suspension initiative announced in April.
The programme allows poorer countries to suspend their debt repayments for the remainder of this year to free up funding to fight the virus.
Last month, the G20's International Financial Architecture working group heard that so far 41 countries had applied for the debt relief.
