Global Debt

Context

• Sri Lanka's unsustainable debt and severe balance of payments crisis highlight the broader issue of increasing debt in developing countries.

About Global Debt

1. Global debt encompasses borrowings by governments, private businesses, and individuals worldwide.
2. Governments borrow to cover various expenditures not met by taxes and revenues. This may include paying interest on past borrowings. Private entities primarily borrow for making investments.

Growing Debt Trends

1. Developing nations often accumulate debt for large-scale infrastructure projects, promoting economic growth.
2. A recent United Nations report reveals that global public debt surged to an all-time high of $92 trillion in 2022 from $17 trillion in 2000.

Reasons Behind Growing Debt

1. Higher Costs: Developing countries face significantly higher interest rates than developed ones.
2. Resource Allocation: Half of these nations allocate over 1.5% of GDP and 6.9% of government revenues to interest payments.
3. Shift to Private Creditors: Increasing reliance on market-driven borrowings from private creditors, diverging from traditional reliance on multilateral institutions.
4. Debt Restructuring Challenges: External creditors avoid restructuring debt for countries in crisis.
5. Internal Factors: Poor debt management, inefficient tax policies, and legal weaknesses contribute to the problem.

Concerns Raised Due to High Debt Burden

1. Debt Sustainability: High debt burdens force countries to borrow from more expensive sources, exacerbating vulnerabilities and complicating debt crisis resolution.

• Example: Sri Lanka losing international financial market access in 2022 due to unsustainable public debt.

2. Impact on Developmental Spending: Countries spending more on interest than health or education affects developmental priorities for 3.3 billion people.
3. Hindrance to Sustainable Development: Over 70% of public climate finance is in the form of debt, limiting spending on climate initiatives in debt-ridden countries.
4. Political and Social Turmoil: Economic struggles blamed on governments lead to political instability.
5. Global Financial Stability: High debt levels in developing countries contribute to global financial instability.

Way Forward

1. Inclusive Financial Governance: Enhance the genuine involvement of developing countries in international financial governance.

   • Implement reforms, such as updating IMF quota formulas, to reflect the evolving global scenario.
2. Ensuring Liquidity in Crisis: Provide increased liquidity during crises through IMF and MDBs to discourage unsustainable high-interest financing by developing nations.
3. Transparent Debt Reporting: Mandate comprehensive and transparent reporting of public debts by all countries.
   • Greater transparency helps prevent the accumulation of significant "hidden" liabilities, which may later transform into explicit government debt.
4. Prudent Debt Management: Encourage low-income countries to adopt cautious approaches in acquiring new debt.
   • Focus on attracting foreign direct investment and boosting tax revenues instead of heavily relying on loans.
   • Lenders should assess the impact of new loans on the borrower's debt position before extending fresh credit.
5. Promoting Debt Restructuring Collaboration: Foster collaboration among official creditors to prepare for debt restructuring cases, especially those involving non-traditional lenders.
6. Fulfilling Climate Finance Commitments: Provide credit for climate mitigation to address one of the leading causes of high public debt.

Conclusion

1. Balanced Approach: Maintaining a balanced approach to global debt management is crucial for economic stability and sustainable growth.
2. Key Measures: Monitoring debt levels, implementing prudent fiscal and monetary policies, and strengthening international financial systems are vital steps in mitigating risks associated with growing global debt.
3. Long-Term Prosperity: Striking the right balance between debt accumulation and economic growth remains essential for long-term economic prosperity.

Must Check: Best IAS Coaching In Delhi