IMF Says Global Debt Posted The Steepest Decline In 70 Years

Key Insights

• IMF notes that global debt fell in 2021 from its peak level in 2020. 
• In dollar terms, global debt continued to increase. 
• According to the IMF, governments should reduce inflationary pressures now while dealing with debt vulnerabilities over the medium term.

Global Debt Fell To 247% Of Global GDP

According to the latest update of the IMF’s Global Debt Database, total public and private debt decreased in 2021 to the equivalent of 247% of global GDP.

This is a reduction of 10 percentage points from the peak level that was reached back in 2020, when countries borrowed money to provide support to the economies during the acute phase of the coronavirus crisis.

In dollar terms, global debt continued to increase and reached a record $235 trillion in 2021.

The reduction of the global debt was driven by the reduction of private debt, which fell by 6 percentage points to 153% of global GDP. Public debt declined to 96% of global GDP.

Global debt was roughly 19% of GDP above pre-pandemic levels at the end of 2021.

Managing High Debt Levels May Be Difficult

According to the IMF, “managing the high debt levels will become increasingly difficult if the economic outlook continues to deteriorate and borrowings costs rise further.”

However, IMF notes that high inflation levels will help reduce debt ratios in 2022. At the same time, IMF highlights the dangers of the situation when inflation becomes entrenched.

In case high inflation levels become persistent, investors will demand a higher inflation premium to lend to the public and private sectors.

IMF has also highlighted the growing sensitivity of bond markets. Most likely, IMF is talking about UK bond market reaction to the spending plans of the former Prime Minister Truss, which pushed the yield of 10-year UK government bonds towards 4.60%. The yields have declined towards the current levels in the 3.00% – 3.20% range when the new Prime Minister Sunak presented a more conservative fiscal policy.

IMF says that governments should adopt fiscal strategies that help reduce inflationary pressures now while dealing with the debt vulnerabilities over the medium term. It remains to be seen whether they will be successful at implementing such strategies in 2023.

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