The war in Ukraine is adding to the strain on public finances even as countries are still reeling from the pandemic. Extraordinary policy support during the pandemic stabilized financial markets and gradually eased liquidity and credit conditions around the world, contributing to the recovery. But deficits increased and debt accumulated much faster than during previous recessions, including the global financial crisis.
According to the IMF’s Global Debt Database (Figure 1.4), overall borrowing jumped by 28 percentage points to 256 percent of GDP in 2020. Government borrowing accounted for about half of this increase, with the remainder from nonfinancial corporations and households. Public debt now represents close to 40 percent of the global total—the most in almost six decades.
Governments are now struggling with rising import prices and debt bills in a highly uncertain environment of elevated inflation and a slowdown in growth. As monetary policy tightens to curb inflation, sovereign borrowing costs will rise, narrowing the scope for government spending and increasing debt vulnerabilities, especially in emerging market and developing economies. To complicate matters, the extent of liabilities and their terms are not fully known in many cases.
Public debt now represents close to
of the global total—the most in almost six decades.
(percent of GDP)
Emerging market middle-income economies excluding China
Low-income developing countries
- Nonfinancial corporations
- Household debt
- Public debt
Sources: IMF, Global Debt Database; IMF, World Economic Outlook; and IMF staff calculations.
Note: Public debt refers to the largest category of debt available (nonfinancial public sector, general government, and central government, in decreasing order). Private debt includes only loans and securities. All income and regional groups follow the World Economic Outlook’s methodology. Total debt (as a percentage of GDP) is close but not exactly equal to the sum of the components of public and private debt. This is because of the difference in country coverage for the corresponding variables, which causes the corresponding country weights to differ. Here, household debt is used as the residual. Total debt for the world in 2020 is estimated at 256 percent; advanced economies at 300 percent; the United States at 298 percent and advanced economies excluding the United States at 301 percent; emerging market economies excluding China at 137 percent and low-income developing countries at 87 percent of GDP.
GFC = global financial crisis; pp = percentage points.
To address the problem of unsustainable debt, the G20 and the Paris Club reached an agreement in November 2020 on a Common Framework for Debt Treatments beyond the earlier Debt Service Suspension Initiative (DSSI), which aims to deal with insolvency and protracted liquidity problems in eligible countries by providing debt relief consistent with the debtor’s spending needs and capacity to pay.
The Common Framework is off to a slow start: not a single country has achieved restructuring to date. The nature of the delays is varied and traces both to creditors and debtors, but urgent action is needed by all relevant stakeholders to ensure that the framework delivers. This includes clarifying steps and timelines on the framework process, early engagement with all stakeholders, more clarity on how comparability of treatment of private sector creditors will be implemented, and expansion of the framework to other non-DSSI-eligible heavily indebted countries.
A standstill on debt service payments during negotiation under the framework would provide relief to debtors under stress and provide incentives for faster agreement. Jointly with the World Bank, the IMF will continue to support implementation of the framework.
More broadly, governments must adopt medium-term policy frameworks that balance short- term needs and investments with medium-term fiscal sustainability. Reforms to improve debt transparency and strengthen debt management policies and frameworks are essential to reduce risks. To support low-income countries and emerging market and developing economies in this effort, the IMF and World Bank have, since 2018, been addressing rising debt vulnerabilities through a multipronged approach. Work launched under the multipronged umbrella to enhance debt transparency continues, including by strengthening debt management capacity, applying accurate debt analysis tools, and improving policies. The IMF continues to work with partners to strengthen the debt resolution architecture.
For low-income countries, reforms to the IMF’s debt limits policy, which went into effect in June 2021, give those countries more flexibility to manage their debt while incorporating safeguards to preserve or restore debt sustainability. The debt limits policy is an important tool for addressing debt vulnerabilities and a useful reference framework for lending decisions by other creditors.
The IMF provided debt relief totaling
(around $927 million) to its poorest members.
Debt relief by official creditors was made available through the G20 DSSI, which the IMF, together with the World Bank, helped support. The initiative took effect in May 2020 and delivered $12.9 billion in debt relief to 48 countries before it expired in December 2021.
In parallel, the IMF provided debt service relief on its own lending under its Catastrophe Containment and Relief Trust (CCRT) to its poorest members. The IMF Executive Board approved the fifth and final tranche of this relief in December 2021, and the relief effort expired in April 2022, bringing total debt relief close to SDR 690 million (about $927 million; see Table 2.3). Eighteen IMF members and the European Union helped finance this support, with grant pledges of about SDR 609 million ($819 million).
With the end of debt relief, and interest rates set to increase, borrowing costs could rise significantly, placing pressure on national budgets and making it increasingly difficult for low-income countries to service their debt. About 60 percent of low-income developing countries are already at high risk of or in debt distress. The economic shocks from the war in Ukraine only add to their challenges. Continued support from the international community will be critical for these countries.
Sudan, meanwhile, has taken the necessary steps to begin receiving debt relief under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. It is the 38th country to reach this milestone, known as the HIPC decision point. Once it reaches the HIPC completion point, Sudan’s external public debt will be reduced by more than $50 billion in net present value terms, representing more than 90 percent of its total external debt. The normalization of Sudan’s relations with the international community has enabled it to obtain access to additional financial resources, setting the country on a path to achieve more inclusive growth.
Major structural transformations are underway. Policymakers should seize the opportunities.