Global debt refers to the total obligations owed by households, governments, and corporations, around the world. According to the Institute of International Finance (IIF), world debt grew by $8.3 trillion, in the first quarter of 2023, to reach a total stock of $304.9 trillion. The value is a staggering $45 trillion higher than pre-pandemic levels. Using IMF estimates of a $105 trillion world economy (GDP), a debt-to-GDP ratio of 290% (304,9÷105) is deduced from the numbers. However, the IIF posits that world debt-to-GDP is around 335%. This means that, the level of debt in the world has grown so much, so that, a year’s worth of GDP is not enough to cover it. Instead, it will take three full years worth of GDP to settle the current debt levels. Since debt is not practically addressed in that manner, the ratio is mostly used to deduce the nature and severity of the global debt burden. The portion of government and corporate debt has been more concerning of late, as both have grown substantively higher than household debt, which has been rather conservative. The problem with a growing debt to GDP ratio is that, at some point, debtors will be unable to repay what they owe and this may trigger a global debt crisis. Rising interest rates, inflation, and geopolitical tensions are some of the key issues which can exacerbate the situation. For instance, through 2022, the European Central Bank and Federal Reserve Bank, raised interest rates by an average of 3%. This average imputes the U.S. rate increases of 3.8%, with European increases of 2% and then divides by two ( (3.8% + 2%) ÷ 2). Using a total debt stock of $304.9 trillion; If 35% ($106.7 trillion) of the world’s debt is on variable interest rates- that indicates an additional $3 trillion ($106.7 × 3%)in interest expenses, required to service debt around the world. Typically, fixed debt is refinanced. Resultantly, due to the refinancing of the fixed debt component, it is expected that, over time, the $3 trillion in additional payments will rise to around $9 trillion.
Solutions to this problem include; reduced lending by financial institutions, restructuring poorly performing enterprises so that they grow, earning more revenue by making debt more productive, writing down (reducing or cancelling) less productive debt and less spending or deficits, on the part of governments. To achieve this; policy makers, society, financial institutions and corporations have to synergistically work towards reprogramming how the spending and credit systems and behaviours work.
Besetting the growth in debt are challenges which include the fact that, consumers actually need more credit, now than before, in an environment of high interest rates, inflation and unemployment. Additionally, governments need to respond to climate change and create green energy solutions as the world’s oil is running out. High global inflation is also increasing the need for governments to intervene through more welfare programs to ensure that citizens have enough food and energy to survive. Ageing populations in some advanced economies, such as Japan, are also increasing pressures on welfare expenditure.
Global public debt is reported to have reached $92 trillion, which is almost 90% of world GDP.
A look at advanced economies shows that they are a not exempt from the heavy debt burdens. Japan, U.S.A, and Greece, make up the countries with the highest government debt to GDP ratios, in the world. Nevertheless, since they have more capacity to repay, it is the middle-income and low income countries, which are in the most distress. Achim Steiner of the UNDP, states that, there are already 50 low income countries which are under the scrutiny of his’ organization, that are expected to be in debt default, imminently.
South Africa
In 2010, government debt-to-GDP ratio was close to 35%. Since then, it has been steadily increasing, although service delivery protests have been equally escalating. This puts into question, whether public spending is being channelled to its rightful use, or a political patronage system, through corruption. The five year period from 2017-18, to 2021-22 financial year, saw a shift from the modest increments in budget deficits, to a marked jagged swing. In that period, expenditure was so liberal that, public debt increased almost twice, from R2.5 trillion (2017-18), to R4.3 trillion (2021-22). As a result of these acute deficits, government expenditure on debt servicing costs, is expected to reach almost R500 billion, this year. Additionally, owing to a lack of revenue and crises, the government had to turn to the World Bank and IMF for loans worth $750 million and $4.3 billion, respectively. This was a first of such moves (budgetary support from World Bank and IMF), since independence, in 1994. Borrowing from institutions such as the World Bank or IMF, can be a cause for concern because typically, those organizations demand economic restructuring in exchange for credit. Gravely, the historical experiences of several countries which have undergone IMF reforms, shows that they are usually driven into deeper crises, through the multilateral institution’s prescriptions. Thus, it is vital for the nation to steer clear of budget deficits and reduce its public debt so that it can retain its sovereignty and ring-fence the welfare of citizens. To add to the need for vigilance on the part of Treasury, is the prediction that, the country’s debt levels will exceed 100% of GDP, by 2024-25 and rise to almost 114% by 2028-29. Without adequate economic growth, which is necessary for government revenue expansion, these statistics point out to the fact that, South Africa is getting closer to the debt trap territory, fast.
Prognosis
According to an S&P Global, January 2023 world debt report, the eight years before covid, saw an average aggregate debt growth of 5%, annually. It is reasonable to expect the same growth, for the next eight years after the pandemic, as a base case scenario. However, the need for debt has grown even higher, than the pre-pandemic years, especially due to government spending aimed at addressing welfare issues and climate change. Such growth levels show that averting a debt crisis might be circumvented temporarily but it may be ultimately insurmountable.
By: Kevin Tutani
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