The world economy has been a major subject of focus since the pandemic crisis began. A brief review of the past decade shows that after a great stint of economic surge, the economies around the world were showing signs of slow down much before Covid-19. In fact, a number of predictions professed an economic downturn in 2020, although the reasons given varied largely.
Covid-19 put all speculations at rest and became the sole monumental reason behind a major economic crisis that is being said to be much larger in stature than the great depression of the 1930’s. Not only did the Indian Monetary Fund (IMF) forecast that the global economy will shrink by 4.4% in 2020 but also made grave revelations about the ballooning global debt wave.
Before Covid-19 pushed international debt levels to unprecedented heights, global debt has surged a few times earlier. An article by World Economic Forum highlights that since 1970, the global economy has experienced four debt accumulation waves, as per World Bank data. These occurred across 100 countries, culminating in critical financial crises in several developing and emerging economies.
The ongoing debt wave is the fourth wave that started in 2010, and much before the pandemic crisis hit, it already took acquired great dimension, appearing to be worse than the previous three waves. Underlining this alarming rise in global debt, David Malpass, World Bank Group President said in December 2019, “The size, speed and breadth of the latest debt wave should concern us all.” The below chart shows the basis of this claim.
Image: IMF, World Bank
Understanding the rising debt wave
The report, Global Waves of Debt: Causes and Consequences, where this chart was published first, was launched towards the end of 2019, much before the Covid-19 pandemic throttled the global economy. After the economic impacts of the pandemic started surfacing, the debt scenario worsened rapidly, as governments from around the globe started borrowing to boost their national economies with stimulus packages. As a result of this, the Institute of International Finance predicted in November 2020, that global debt will touch $277 trillion by December 2020, marking a debt-to-GDP ratio of 365%.
IMF found that so far about $12 trillion has been expended on unprecedented financial actions like tax cuts, capital injections, loans, etc. If these numbers are added to the economic stimulus measures currently in pipeline, the global public debt will rise to a record level of roughly 100% of GDP by 2025.
History sounds an alarm
In the blog titled The Debt Pandemic, the experts sound an alarm that the review of about 89 default stories from 1827 to 2003 demonstrates that sharp rise in debt in most cases leads to defaulting. While we all hope that this time it will usher a different ending, history advocates a different conclusion.
Historical record shows that government indebtedness is an important indicator of future economic health. With the rollout of Covid-19 vaccines, the green shoots of economic recovery are already visible in many economies globally. However, if the global GDP will rise by 5.2% in 2021 as foretasted by IMF remains to be seen. Moreover, the future borrowing trends in near future to boost economic recovery is harder to predict.
All that be said with certainty is that the current levels of international global debt have risen to alarming heights. Countries must learn from the past and ensure suitable measures are taken to keep the future growth sustainable while neutralising the debt levels.