The global debt crisis has risen to unprecedented levels, casting a frightening shadow over the global economy. According to the latest report from the Institute of International Finance, the volume of global debt by the end of December 2023 amounted to about $307 trillion, which constitutes a significant increase of at least $10 trillion over the previous year’s figures.
The report said that the ratio of global debt to GDP now stands at about 336%, up from 334% in the fourth quarter of 2022. The ratio witnessed a decline for 7 consecutive quarters, before resuming its upward path in the first half of 2023.
According to the report, this rise includes borrowing by governments, companies and households, which poses a frightening threat to both developed and developing countries.
The report highlights rising debt that mainly involves developed countries such as the United States, Japan, the United Kingdom and France. This rise has pushed the global debt-to-GDP ratio to record levels, which is a worrying indicator of potential global economic pressures.
Difficult effects on economies
The report on the expectations of senior economists at the World Economic Forum depicts a worrying picture, as 6 out of every 10 senior economists expect a global economic decline, noting that the increasing inflation has been a catalyst for the debt wheel, which has pushed global debts to record high levels, which affects… The financial landscape of developed countries.
The report quotes the Institute of International Finance as saying, “High indebtedness rates and high debt levels increase the burdens of governments, which in turn leads to increased pressure on domestic debt.”
After a long period of low interest rates, the US Federal Reserve (central bank) and other central banks in the world responded to rising inflation rates by raising interest rates.
In this context, an extensive report on international debt – issued by the World Bank – emphasizes the plight of developing countries, especially low- and middle-income countries, in the face of debt inflation. The report indicates that in developing countries, a record amount of $443.5 billion was redirected to service public and guaranteed external debt in 2022 alone, which is a record number, diverting critical funds from basic sectors, such as health, education, and environmental initiatives, in those countries to service debt.
This has intensified debt-related vulnerabilities in low- and middle-income countries, the World Bank said. In the past three years alone, there have been 18 sovereign debt defaults in 10 developing countries, a higher number than in the past two decades, while about 60% of low-income countries are at high risk of default or are in debt. Indeed from that.
Experts in the field of debt say that the situation requires a comprehensive strategy to reduce the financial burdens on poor countries on the basis of initiatives issued in the late 1990s and early 2000s.
The World Bank said debt is a particular problem for the 75 low-income countries that qualify for low-interest loans and grants from the International Development Association. Debt service payments for this group of countries will reach a record level of $88.9 billion in 2022 after interest payments quadrupled in the past decade.
The report concluded that the total debt servicing costs of the 24 poorest countries in 2023 and 2024 are expected to rise by up to 39%.
The World Bank’s chief economist, Indermeet Gill, confirms the seriousness of the situation, saying that “record debt levels and high interest rates have reached the path of a real crisis in many countries.”
Current trends and future challenges
While the global debt burden witnessed a slight decline for two consecutive years – after the Corona pandemic – according to the Institute of International Finance, this decline was not sufficient to that degree. Public debt has fallen by 8% of GDP over the past two years, offsetting only half of the rise resulting from the pandemic year.
The report highlights ongoing challenges. Before the pandemic, global debt-to-GDP ratios had been rising for decades, indicating chronic and continuing difficulties in managing debt levels.
The IIF report urges immediate and coordinated action to prevent a full-blown crisis. While Gill stresses the need to take rapid and coordinated measures, saying, “The situation calls for rapid and coordinated action from the governments of the debtors, private and official creditors, and international financial institutions.”
The report indicates the need for transparent procedures, improving debt sustainability tools, and accelerating restructuring procedures to avoid a potential economic catastrophe.
Improved debt transparency and sustainable borrowing practices emerge as key requirements for effective debt management. The World Bank stresses the need to export clear data to guide debt restructuring efforts and ensure economic stability and growth. This is confirmed by Heshan Fu, Secretary General for Statistics at the World Bank, when he stated that “debt transparency is the key to sustainable public borrowing, rules-based lending practices, and social responsibility to end poverty.”
The global debt crisis poses an imminent threat to economic stability and sustainable development. While immediate action is necessary to prevent further escalation, policymakers and experts from international financial institutions are urged to cooperate on transparent measures, debt restructuring and sustainable borrowing practices.
The seriousness of the current situation requires a global commitment to reduce potential economic risks, ensuring that vital resources are directed towards sectors essential for inclusive and sustainable growth.
