Skip to main content

Low interest rates and high debt will shape the years ahead

Debt Dynamics

Low interest rates for over a decade have led to a buildup of global financial risks and historically high levels of government and private debt in most countries. These debt vulnerabilities have significantly increased with the pandemic and the Great Lockdown, which has led to large increases in debt and deficits beyond those recorded during the global financial crisis.

As countries fight the pandemic, they have committed to spend whatever it takes to save lives, protect people from losing jobs and incomes, and spare companies from bankruptcies, while supporting a recovery.

Low interest rates make borrowers more vulnerable if interest rates rise, and they erode bank profits, which hampers banks’ ability to lend money to businesses so they can grow.

Fast-Increasing Debt and Deficits

Covid-19 and its economic impact will increase fiscal deficits and public debt ratios across countries given higher spending and plunging revenues

Contributions to the global government debt change 2007–20, % of GDP

Source: IMF, World Economic Outlook Database.
Note: Refers to calendar years.

The pandemic hit many vulnerable low-income countries hard: 50 percent of these countries are at high risk of debt distress. Economic shocks like the spread of a global virus can stall their economies and reverse financing flows, which further complicates their ability to manage their debt.

The IMF, along with other partner institutions, has worked with low-income countries to help strengthen their debt management and transparency practices. This includes providing technical support as countries develop and publish debt management strategies and debt reports.

Member Voices

The New Unknown

On behalf of the Kyrgyz authorities, I would like to express our deepest gratitude to the International Monetary Fund for the fast response. This is the quickest disbursement from an IFI [international financial institution] in the history of my country. The government of the Kyrgyz Republic highly values its cooperation with the IMF.
Tolkunbek Abdygulov

Chairman of the National Bank of the Kyrgyz Republic

Also, given the financing needs to achieve the Sustainable Development Goals, the IMF and the World Bank (under the aegis of the Group of 20) developed operational guidelines for sustainable lending practices. Furthermore, the IMF and the World Bank conducted a comprehensive assessment of the evolution of debt vulnerabilities in lower-income economies.

Supporting the recovery with fiscal measures while managing higher government debt levels is a delicate balancing act.

Supporting the recovery with fiscal measures while managing higher government debt levels is a delicate balancing act. Low interest rates will make it easier for some countries to carry higher debt. Nevertheless, countries need to address the medical emergency, provide lifelines to people and firms, and support the economic rebound while ensuring long-term debt sustainability.

Further Reading