Global debt

Rising global debt has, of late, become a matter of great concern. According to a database released by the IMF on 14th May, 2018, the worldwide debt has now reached a record new high of dollar 164 trillion or equal to 225 percent of global GDP. This level surpasses the previous high of 213 percent of GDP recorded in 2009. The IMF has warned that the world economy was now more indebted than before the global financial crisis (GFC) more than a decade ago and immediate action was needed to stop the next downturn. The IMF report notes that most indebted economies are the richer ones. It was striking that the 2016 top borrowers viz the US, China and Japan accounted for more than half of the global debt, significantly greater than their share in global output. While public debt increases were mainly driven by advanced economies, the private debt surge was mainly explained by emerging market economies. The global debt ratios have been on the rise since the World War II, mostly because of borrowings by advanced economies but the gap between the G20 advanced and emerging market economies was still significant, exceeding 90 percent of the GDP on average. Private sector was identified as the driving force behind global indebtedness, which has almost tripled its debt since 1950.
The ascent of emerging market economies was, however, a relatively new development and by 2009, these economies had become the major force behind global trends. Private debt ratios doubled in a decade, reaching 120 percent of GDP by 2016. Global public debt went steadily down up to mid-1970s, mainly because growth, inflation and financial repression in advanced economies had pushed debt ratios down. Since then, advanced economies have experienced a continuous increase in public debt. Among emerging market economies, public debt reached its peak of 63 percent of GDP at the end of 1980s after which it declined partly due to consolidation efforts, restructuring and favourable cyclical conditions. However, in the last few years, decline in commodity prices and rapid spending growth had pushed the debt levels up again. Rising public debt in low income developing countries has resulted in a rapid uptick in their debt ratios due to high primary deficits and the fall in commodity prices since 2014.
We feel that the report on the worldwide debt by the IMF is very comprehensive and draws the right conclusions. The database covers both public and private borrowings of 190 countries which virtually covers the entire world and dates back to the 1950s. The linkage of increasing burden of the overall debt with the shrinkage of economies also sounds very valid. The warning of the IMF that the world economy is now more indebted than before the GFC more than a decade ago shows that if proper measures are not adopted to reduce the debt levels, another downturn may be around the corner. Another aspect of the IMF analysis is the variation of debt levels among different categories of countries. Contrary to the perception of an ordinary person, richer countries of the world are more in debt than the low income, less developed economies. For instance, the US, China and Japan accounted for more than half of the global debt while the debt ratios in poorer countries only increased due to balance of payments needs. However, such a situation cannot lead to the conclusion that less developed countries, given the experience in developed countries, have still a lot of space to increase their debt levels. The capacity of the developed countries to use higher levels of debt is due to their status of currencies as reserve currencies, and their ability to repay loans while the loans granted to the poorer countries are generally for consumption and balance of payments purposes. Obviously, if the less developed countries follow the example of richer countries, it will be much harder for them to repay the debt and they will end up in trouble.
So far as Pakistan is concerned, it is included in high borrowers of both public and private loans. Pakistan's external debt had reached an all-time high of dollar 88.89 billion in the last quarter of 2017, from a low of dollar 33.17 billion in the third quarter of 2004. The amount of external borrowings in the last few years have been particularly very high. Unfortunately, most of the debt was taken for covering the current account deficit of the country rather than pursuing accelerated development goals which could support debt repayment capacity of the country. If this trend continues as indicated by the widening current account deficit and higher budget deficit, the downturn in economic fortune, as warned by the IMF, cannot be ruled out. The authorities of the country, therefore, must take the necessary steps before it is too late.