The International Monetary Fund (IMF) has warned that emerging economies turning to China, India and Saudi Arabia could further increase their debt vulnerabilities.
According to the Fund, their actions could have implications for the processes involved in debt restructuring.
IMF Deputy Managing Director Gita Gopinath, who said this at a conference on ‘Fiscal Policy in an Era of High Debt’, noted that with global public debt tripling to about 92 percent of GDP by the end of 2022, it was important that countries begin to focus on fiscal policy as a means of navigating the debt challenge.
She stated that rising deficits and debts in countries such as the United States have serious ramifications for emerging and developing economies, who are hit by rising rates and weaker currencies.
The Fund added that many economies, particularly low-income countries, were already in debt distress.
“The combination of record-high global debt levels, higher for longer interest rates, and weak growth prospects poses a triple challenge for policymakers. In a shock-prone world, very few countries will have the fiscal space to support their economies,” she said.
To address the situation, Gopinath said countries must consider how to repay any loan collected.
“Demands on government budgets are increasing—from delivering social support (insurer of first resort), to financing the green transition, to bolstering defense spending, to a renewed push for industrial policies and sectoral subsidies.
“Governments need to rethink what they can and cannot do. They cannot be the insurer of first resort for all shocks. Revenues also need to keep up with spending. For our part, the IMF must balance our cautionary policy advice with an understanding of the economic and social forces underpinning these political choices.
“Second, understand monetary and fiscal interactions. Over the past two years, central banks around the world have grappled with how to address elevated and persistent inflation levels. In several cases fiscal policy has not been in sync with monetary policy and that has complicated the fight against inflation. Much more needs to be understood about the precise mechanisms through which fiscal-monetary interactions unfold.
“Third, evaluate vulnerabilities arising not only from public debt levels but also from the composition of debt—the identity of creditors, currency and maturity composition that apply,” she further said.
