from the International Monetary Fund

— this post authored by Vitor Gaspar and Laura Jaramillo

Global debt hit a new record high of $164 trillion in 2016, the equivalent of 225 percent of global GDP. Both private and public debt have surged over the past decade. High debt makes government’s financing vulnerable to sudden changes in market sentiment. It also limits a government’s ability to provide support to the economy in the event of a downturn or a financial crisis.

Countries should use the window of opportunity afforded by the economic upswing to strengthen the state of their fiscal affairs. The April 2018 Fiscal Monitor explores how countries can reduce government deficits and debt in a growth-friendly way.

High government debt is a concern

Of the $164 trillion, 63 percent is nonfinancial private sector debt, and 37 percent is public sector debt. Advanced economies are responsible for most global debt. Nevertheless, in the last ten years, emerging market economies have been responsible for most of the increase. China alone contributed 43 percent to the increase in global debt since 2007. In contrast, the contribution from low income developing countries is barely noticeable.

Public debt plays an important role in rising global debt. Debt-to-GDP ratios in advanced economies are at levels not seen since World War II. Public debt ratios have been increasing persistently over the past fifty years.

In emerging market economies, public debt is at levels seen only during the 1980s’ debt crisis. For low-income developing countries, average public debt-to-GDP ratios are well below historic peaks, but it is important to recall that debt reduction from earlier peaks involved debt forgiveness. Moreover, low-income developing countries’ debt climbed 13 percentage points in the last five years.

Along with debt, the cost of debt service has been rising rapidly in low-income developing countries. The interest burden has doubled in the past ten years to close to 20 percent of taxes . The escalating cost reflects in part the increasing reliance on nonconcessional debt, as countries have gained access to international financial markets and expanded domestic debt issuance to nonresidents.