Rising global debt

The Pak Banker - - FRONT PAGE -

The global debt is­sue is be­com­ing more com­pli­cated with the pas­sage of time. The In­ter­na­tional Mone­tary Fund has just pub­lished its data­base of pub­lic and pri­vate bor­row­ing with the ob­ser­va­tion that world­wide debt has now reached a new record high of $164 tril­lion, equal to 225pc of global GDP. This sur­passes the pre­vi­ous high of 213pc recorded in 2009. The data­base cov­ers both pub­lic and pri­vate bor­row­ing of 190 coun­tries, which vir­tu­ally cov­ers the en­tire world and dates back to the 1950s. It may be re­called here that in April the IMF had warned that the world econ­omy was more in­debted now than be­fore the global fi­nan­cial cri­sis (GFC) more than a decade ago and im­me­di­ate ac­tion is needed to cor­rect the sit­u­a­tion.

Sig­nif­i­cantly, Pak­istan is in­cluded among high bor­row­ers of both pub­lic and pri­vate loans. Although the IMF re­port did not have spe­cific data on Pak­istan, re­ports from other sources put the coun­try's ex­ter­nal debt at more than $88bn in the fourth quar­ter of 2017, from $85bn in the third quar­ter. Ex­ter­nal debt in Pak­istan has av­er­aged at more than $53bn from 2002 to 2017, reach­ing an all-time high of $88.891bn in the fourth quar­ter of 2017, from a record low of $33.172bn in the third quar­ter of 2004.

Para­dox­i­cally, the most in­debted economies in the world are also the richer ones. The top 2016 three bor­row­ers in the world - the United States, China, and Ja­pan - ac­count for more than half of the global debt, sig­nif­i­cantly greater than their share of global out­put. Since the be­gin­ning of the mil­len­nium, China's share in global debt has gone up from less than 3pc to over 15pc, un­der­scor­ing the rapid credit surge in the af­ter­math of the global fi­nan­cial cri­sis (GFC). Now, China alone ac­counts for al­most three-quar­ters of the in­crease in global pri­vate debt.

The IMF re­port notes that com­pared to the pre­vi­ous peak in 2009, global debt is now 12pc of GDP higher, re­flect­ing an in­crease in both pub­lic and pri­vate non-fi­nan­cial debt. It notes that pub­lic debt in­creases have been mainly driven by ad­vanced economies while the pri­vate debt surge is mainly ex­plained by emerg­ing mar­ket economies. Also, global debt ra­tios have been on an al­most un­in­ter­rupted as­cend­ing trend since World War II, mostly be­cause of bor­row­ings by ad­vanced economies, but emerg­ing mar­ket economies have taken the lead in the af­ter­math of the GFC. How­ever, the gap be­tween the debt of the G20 ad­vanced and emerg­ing mar­ket economies is still sig­nif­i­cant, ex­ceed­ing 90pc of GDP on av­er­age. Low-in­come coun­tries only ac­count for less than 1pc of the global debt.

Fig­ures show that the pri­vate sec­tor is the driv­ing force be­hind global in­debt­ed­ness, which has al­most tripled its debt since 1950. The debt of the non-fi­nan­cial pri­vate sec­tor reached a peak of 170 per­cent of GDP in 2009 and has shown lit­tle delever­ag­ing since. The as­cent of emerg­ing mar­ket economies is a rel­a­tively new de­vel­op­ment, which started to ac­cel­er­ate only in 2005.

By 2009, emerg­ing mar­ket economies had be­come the ma­jor force be­hind global trends. Up to the mid-1970s global pub­lic debt went steadily down only to re­verse its course after­wards, mainly be­cause growth, in­fla­tion, and fi­nan­cial re­pres­sion in ad­vanced economies pushed debt ra­tios down. Since then, ad­vanced economies have ex­pe­ri­enced a con­tin­u­ous in­crease in pub­lic debt. Among emerg­ing mar­ket economies, pub­lic debt reached its peak of 63pc of GDP at the end of the 1980s, af­ter which it de­clined partly re­flect­ing consolidation efforts, re­struc­tur­ing, and favourable cycli­cal con­di­tions. How­ever, in the last few years, the de­cline in com­mod­ity prices and rapid spend­ing growth pushed debt lev­els up again. Pak­istan should take the IMF re­port se­ri­ously and find ways to re­duce its debt bur­den.

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