An analysis in Global Waves of Debt, the World Bank has found that in 2018, a record $55tn in total debts was attributed to the Emerging market and developing economies (EMDEs).
The institution said that this was the straight eighth year that noted an increase in debt by the EMDEs which is the “largest, fastest and most broad-based in nearly five decades”.
Most of the 100 countries covered by its analysis were affected by the trend, the Washington-based development agency said, while noting that a large part of the increase in debt has been contributed by China. The analysis also found that both private and public sector organizations were involved in increasing their debt levels.
Since the debt buildup began in 2010, the debt-to-GDP ratio of developing countries had climbed 54 percentage points to 168 per cent, found the analysis which considered the four significant episodes of debt accumulation since 1970.
Consumer, business and government debts equally contributed to the total debt in the EMDEs, the report noted and added that all parts of the economy were under pressure of debt repayments which are mostly owed to banks and international investment funds.
Each year, there has been an increase of seven percentage points on average in the debt-to-GDP ratio of the 100 countries affected. That rate of growth was nearly three times of what was observed during the Latin America debt crisis of the 1980s.
“History shows that large debt surges often coincide with financial crises in developing countries, at great cost to the population. Policymakers should act promptly to enhance debt sustainability and reduce exposure to economic shocks,” said Ceyla Pazarbaşioğlu, the World Bank’s vice-president for equitable growth, finance and institutions.
The risk of a crisis has been mitigated “for now” by the bringing down of rates of interest to historic lows by central banks all across the world since the 2008 global financial crisis as an antidote for low inflation, the report noted. However the dangers of presuming interest rates and inflation would remain low is highlighted by the record of the past 50 years, the report argued.
“Since 1970, about half of the 521 national episodes of rapid debt growth in developing countries have been accompanied by financial crises that significantly weakened per-capita income and investment,” it said.
Funding for investment and infrastructure spending for low-income countries should be borrowed from the international money markets, World Bank executives have previously argued. However since 2015 when the commodity prices started going down, many countries have borrowed to fund welfare projects such as in education, health costs and disaster relief.
“The size, speed and breadth of the latest debt wave should concern us all. It underscores why debt management and transparency need to be top priorities for policymakers, so they can increase growth and investment and ensure that the debt they take on contributes to better development outcomes for the people,” said the World Bank Group’s president, David Malpass.
The economic policies in the poorer and developing world countries should be immediately strengthened and the economies made less vulnerable to external economic shocks, he said.
(Adapted from TheGuardian.com)