Making Debt Work For Development and Macroeconomic Stability

Policy Papers, April 26, 2022

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The coronavirus crisis has stiffened debt and development-related headwinds that had become strong even before 2020.
Sustaining development while maintaining debt sustainability has been made harder by the protracted effects of the pandemic on public finances, earnings and employment, and human capital accumulation of vulnerable populations.
Fiscal support programs financed by public debt provided relief and saved lives and livelihoods.
Debt-induced uncertainty can now dampen investment and growth, especially given rising global interest rates.
Bigger debt servicing burdens will reduce available fiscal space for development and stabilization.
Growing sovereign debt financing needs can crowd out domestic investment.
Over-indebtedness can adversely affect economic development through many channels—“debt overhang,” “fiscal space,” “crowding out” and increased crisis risk—making countries vulnerable to abrupt changes in market sentiment, jeopardizing both stability and growth.

The report underscores trade-offs between providing fiscal support (which saved lives and livelihoods) and the longer-term risks to debt sustainability.
Policymakers face constrained fiscal space for both development and stabilization as debt servicing rises.
Sovereign financing strategies and debt management are central to preserving domestic investment and sustaining growth amid higher debt burdens.

Subjects: Asset and liability management; Debt relief; Debt service; Debt sustainability; External debt; Government debt management; Monetary policy; Political economy; Public debt; Public financial management (PFM)
Keywords: Debt relief; Debt service; Debt sustainability; development policy financing; financing needs; Global; Government debt management; IFC investment project; long-term debt; sustainable development finance policy; transparency policy