How to Use Debt Wisely

IMF News, November 7, 2019

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Speech by Kristalina Georgieva, IMF Managing Director, at the 20th Annual Research Conference, Washington, November 7, 2019.
Framing questions policymakers face:
- When are debt levels too high?
- How can we reduce debt burdens in a fair and growth-friendly way?
- How can we maximize the essential benefits of debt?

Core rationale:
- Debt allows consumption or investment now and repayment later when incomes rise.
- “Credit” derives from Latin for “trust,” central to economic and financial systems.
Economic roles of debt:
- Helps families buy homes, businesses invest, and countries raise capital to support growth and employment.
Policy implications where fiscal space exists:
- Use low or negative interest rates to scale up productive public investments, especially infrastructure and R&D.
- Examples cited: Germany, the Netherlands, South Korea.
- Borrowing can help meet the Sustainable Development Goals when paired with sound macroeconomic policies and a welcoming business environment.
Key statistic:
- Global debt—both public and private—has reached an all-time high of $188 trillion. This amounts to about 230 percent of world output.
- A major driver is the private sector, which currently makes up almost two-thirds of the total debt level.

Historical risks:
- Unsustainable credit booms can have devastating effects (e.g., run-up to the global financial crisis).
Transmission of risk:
- Private debt moved to public balance sheets during the 2008 crisis.
- IMF staff research shows direct public support to financial institutions during the 2008 crisis amounted to $1.6 trillion.
Drivers of debt buildup in developing countries:
- Sharp declines in commodity prices, natural disasters, civil conflict, and high investment spending on unproductive projects.
Current vulnerabilities:
- High debt burdens make governments, companies, and households vulnerable to sudden tightening of financial conditions.
- Global uncertainty from trade tensions, Brexit, and geopolitical risks could shift investor sentiment, leading to financial tightening, higher interest costs, and difficulties rolling over debt—potentially amplifying market corrections and capital outflows from emerging markets.
Impact on development:
- High debt can become a drag on growth as governments spend more on debt service and less on infrastructure, health, and education.
- IMF estimate: 43 percent of low-income countries are either at high risk of falling into debt distress or are already in distress.

1. Ensure borrowing is more sustainable:

Proceed carefully in taking on new debt.
Focus on attracting equity-based investment, such as foreign direct investment.
Boost tax revenues.
Step up the fight against red tape and corruption.
Focus on investment projects with credibly high rates of return.
Increase responsibility of lenders to assess impact of new loans on borrower’s debt position before lending.
Note: IMF-supported programs aim for debt sustainability; Institute of International Finance analysis shows the median Fund-supported program achieved substantial debt reduction within five years.

2. Ensure borrowing and lending practices are more transparent:

Strengthen institutions that record, monitor, and report debt.
IMF and World Bank collaboration to help member countries strengthen debt management capacity and governance frameworks.
Use debt sustainability analysis to highlight risks and help borrowers build or rebuild trust.

3. Encourage better collaboration between borrowers and lenders:

Improve disclosure of debt contracts to reduce risks and increase accountability.
Prepare for debt restructuring cases involving non-traditional lenders, including creditor countries outside the Paris Club.
Establish new forms of official creditor coordination.

Relevance to advanced economies:
- Debates about fiscal policy given prolonged low interest rates and low inflation.
- Questions raised: Are previously unacceptable debt levels now acceptable? Is population aging a game changer? Should traditional fiscal rules and assumptions be reassessed?

The legacy of current economists will be linked to policy advice on debt: “planting the right seeds now—so that future generations can share a more plentiful harvest.”
Conference participants include prominent economists (e.g., Olivier Blanchard, Ken Rogoff) contributing to discussion and policy ideas.

Source: Kristalina Georgieva, "How to Use Debt Wisely", 20th Annual Research Conference, November 7, 2019.