The International Monetary Fund (IMF) is urging policymakers to avoid what it referred to as the “pro-cyclical policy actions that provide unnecessary stimulus when economic activity is already pacing up.”
Instead, the fund has asked most countries to deliver on their fiscal plans and put deficits and public debt firmly on a downward path.
The Director of Fiscal Affairs at the IMF, Mr Vitor Gasper, gave the warning when he addressed newsmen at the ongoing World Bank/IMF Springs meetings in the United States of America (USA) capital of Washington on Wednesday.
“There is no room for complacency, no one can predict—with precision—the ebb and flow of countries’ economies.”
However, he said experience showed that successful governments were those that prepared ahead for storms looming on the horizon.
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“As you learned from the World Economic Outlook, global growth is strong and broad-based,” he stated.
According to him, the economic upswing should be used to accumulate fiscal buffers for tempestuous times that will eventually come.
Mr Gasper said countries were advised to avoid pro-cyclical fiscal policies that exacerbated economic fluctuations and ratcheted up public debt.
He reminded them that the “financial stability and financial risks are the focus of the Global Financial Stability Report, adding that “countries will be better placed to tackle looming risks if they build strong public finances in good times.”
Global debt rising
On the issue of global debt levels, Mr Gasper revealed startling results of the levels of debt, saying, “At US$164 trillion, or almost 225 per cent of GDP, global debt hit a new record high in 2016.”
He said most of it was in advanced economies. Nevertheless, in the last 10 years, emerging market economies have been responsible for most of the increase.
Mr Gasper indicated that China alone contributed 43 per cent to the increase, since 2007.
In contrast, he said, the contribution from low-income developing countries was barely visible on the slide.
Again,Mr Gasper said public debt was currently high in advanced and emerging market economies.
Average debt-to-GDP ratios (at more than 105 per cent of GDP) in advanced economies are at levels not seen since World War II.
For instance, he noted that in emerging market economies, debt (at almost 50 per cent of GDP on average) were at levels that, in the past, had been associated with fiscal crises.
Average debt was only higher during the 1980s –that earned the label “lost decade” in Latin America.
In contrast, for low-income developing countries, Mr Gasper said average debt-to-GDP ratios (at about 44 per cent of GDP) were well below historical peaks.
“But it is important to recall that these peaks involved debt levels that countries were unable to service, and were eventually tackled through debt relief initiatives by the international community.”
“Since the completion of the HIPC/MDRI initiatives, debt levels have been picking up again (it has increased 13 per cent of GDP, in the last five years).”
“Our debt sustainability analyses indicate that 40 per cent of low-income countries are currently at high risk of or already in debt distress. It doubled in five years,” he said.
Furthermore, he noted that debt service had also been rising rapidly, particularly in countries with high inflation rates.
The interest burden had also doubled, in the past 10 years, to 20 per cent of taxes.
The escalating cost reflects in part, the increasing reliance on market instruments. Almost half is now non-concessional debt, up from a quarter in 2007.
Mr Gasper added that it was imperative that low-income developing countries strengthened their tax capacity.
“This will allow them to meet their debt service obligations. It will also allow them to finance spending priorities, such as health, education and public infrastructure; to attain the 2030 Sustainable Development Goals.”