A top IMF official has called on seven of the world’s largest economies to bring their government borrowing under control more quickly, saying this would help the fight against high inflation and financial instability.
Vítor Gaspar, head of fiscal policy at the IMF, told the Financial Times that Brazil, China, Japan, South Africa, Turkey, the UK and the US were likely to push public debt up by more than 5 percentage points of gross domestic product over the next five years.
By 2028, the world’s public debt burden was on course to match the value of goods and services produced in the world. “By the end of our projection horizon — 2028 — public debt in the world is expected to reach almost 100 per cent of GDP,” Gaspar said, adding that this was “back to the record levels set in the year of the pandemic”.
China and the US, the world’s two largest economies, were the two main drivers of the global increase in public debt. Yet there was little discipline from financial markets to improve their finances.
“Neither country has a weak [economic] growth performance,” Gaspar said. “Eventually, policies will have to change to bring debt back down to earth, but the two largest economies in the world do have capacities and resources that most other economies lack.”
Ahead of the launch of the IMF’s fiscal monitor report, Gaspar said advanced economies and the largest emerging markets could help reduce banking turmoil and contain inflation by getting a grip on their finances.
“Fiscal tightening can help by moderating the growth of aggregate demand and therefore contributing to more moderate increases in policy rates,” he said, adding that this in turn would “ease the pressures on the financial system” triggered by the surge in borrowing costs over the course of 2022.
The surge contributed to the demise of Californian lender Silicon Valley Bank, which has placed pressure on other midsized lenders in the US.
It has also pushed several sovereigns into default and sparked concern among IMF officials that other poorer countries could fall into distress.
Gaspar said about six in 10 of the world’s economies, mostly the poorest countries, already had to keep their public finances under control because they had little access to debt markets.
He called on creditor nations, which had been locked in lengthy negotiations over debt restructuring, to help ensure the situation of sovereigns in distress was manageable. “[Poorer countries] are having to reduce debt in a way that is very painful,” he said.
Some countries were doing well and reaping the benefits of sound fiscal policies, Gaspar said. He singled out Serbia, which has an IMF programme, for praise along with Costa Rica and Uganda.
Among richer countries, he noted that New Zealand had a persistently strong fiscal position since the late 1980s, and there had been large reductions in public debt in Greece, Cyprus, Ireland and Portugal. All four countries had needed emergency loans during the eurozone crisis of the early 2010s.
