Higher interest rates 'important driver' of global debt growth, IMF fiscal chief says

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With global public debt projected to grow faster, higher interest rates have been pushing up borrowing costs, becoming an important driver of public debt dynamics, an International Monetary Fund (IMF) senior official has said.

Global public debt went up quite a lot in the pandemic year 2020, and then came sharply down in 2021 and 2022 given strong catch-up growth plus inflation surprises, said Vitor Gaspar, director of the IMF's fiscal affairs department, in a recent interview with Xinhua in Washington D.C., ahead of the ongoing World Bank-IMF Annual Meetings in Marrakech, Morocco.

Despite that, global public debt-to-GDP (gross domestic product) ratios are now higher, and projected to grow faster than in pre-pandemic projections, Gaspar noted.

According to the newly released IMF's Fiscal Monitor, total debt liabilities of governments, non-financial corporations and households in 2022 stood at 235 trillion U.S. dollars, or 238 percent of GDP.

The turning up of debt reflects slowing growth, rising real interest rates and budget deficits dipping further into the red, in part reflecting rising borrowing costs, as well as growing debt in major economies, the report noted.

"Borrowing costs are increasing for all country groups, and that has to do with rising public debts in many countries, plus increases in interest rates in almost all countries," Gaspar said.

For advanced economies, interest expenditures on budget are now 2.4 percent of GDP, compared with 2.1 percent in 2019. The trend is about the same for emerging markets from 2.1 percent of GDP in 2019 to 2.5 percent now in 2023, he noted.

"But perhaps more importantly, interest expenses on budget lag developments in market interest rates. It takes time for market interest rates to be reflected on effective interest rates for the budget," said the IMF senior official.

Although debt vulnerabilities and risks remain elevated, and fiscal restraint is a much-needed ingredient in the policy mix in many corners, the IMF's assessment is that the risk of a "systemic" wave of sovereign debt defaults remains low.

The Fiscal Monitor looks at the fiscal implications from the green transition. It argues that it is necessary to rely on a combination of policy instruments, including carbon pricing, complemented by that aimed at correcting remaining market failures, as well as fiscal support for the vulnerable.

The private sector has a crucial role to play in a successful green transition, the Fiscal Monitor noted, adding that public policies should provide a framework that favors private sector participation in investment and financing.

"One very important instrument to provide incentives for the private sector to come into this area is that carbon pricing increases gradually so that investors have enough information to calculate the profitability of their investments. And that leads us to the importance of policy certainty," Gaspar said.

Noting that regulatory instruments are effective and important, the IMF fiscal chief said that firms that have set emissions targets or are in an environment where they face regulatory emission standards are likely to invest more in green technologies, in particular in energy-intensive tech sectors, or hard-to-abate sectors.

Citing Indian economist Raghuram Rajan's view that an easy and intuitive way of looking at global warming and climate change is in terms of per capita emissions, Gaspar said if we accept Rajan's premise, "one is led to believe that revenue-sharing of common mechanisms is a good way forward."

The IMF official praised China's progress towards a green transition, saying that the progress has been "impressive" in some areas.

One of the most impressive aspects is innovation, he said, and innovation in China is crucial well beyond the green transition. "The transition to an innovation-based economy is likely to be a dominant characteristic of the new growth model for China," Gaspar said.

China is taking a worldwide lead in the area of solar technology, he noted. And in electric vehicles, and in particularly in battery technology, it does seem that "China right now is defining the technological frontier at the world level," he added.

On China's fiscal policy, the IMF official said he thinks the challenge for China is to use the ample policy space to put public finances at the service of stability and growth, as it faces a number of issues associated with the adjustment of the real estate sector.

The other aspect has to do with China's transition to a new growth model, and public finances are crucial in these dimensions as well, Gaspar said.

The extension of the social safety net in China will decrease the need for precautionary savings on the part of households, and so facilitate this transition to a new growth model in China which relies more on domestic demand, innovation and consumption, he said.

Commenting on the U.S. Congress' avoiding a government shutdown in a last-minute deal, the IMF official said "political brinkmanship" is not an element of a well-ordered budgetary procedure.

"It's something that creates uncertainty and volatility in markets. It's potentially a risk for the U.S. economy and for the global economy," he said. 

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