In a global slowdown, debt vulnerabilities are multiplying. Increasing interest rates, declining growth, and low commodity prices are all raising the risk of debt crises around the world. And when a country starts from an elevated debt level, the impact of these shocks is much greater – a high-income country’s growth slowdown can lead to a sudden jump in its debt-at-risk, and a low-income one can see its debt ratio climb even faster.
High debt levels create huge risks for the world’s poorest countries, squeezing resources for investments in education and health. 3.4 billion people live in low-income countries today where debt servicing takes up 10% or more of government revenues. And it’s getting worse – according to the latest Chief Economists Outlook, more than half of economists see public debt as a threat to macroeconomic stability.
We can avoid a global debt crisis, but only with an urgent and holistic approach. It will require a return to prudence, with governments aiming for debt levels at or below the estimated ‘safe’ thresholds of 52-54% of GDP for low-income countries and 60 percent for high-income ones. And it will require a shift in incentives, with a focus on investment spending that improves productivity rather than merely raising deficits.
The good news is that history demonstrates that debt relief can work, and doesn’t exacerbate corruption. But for low-income countries to reap the benefits, they need strong political institutions, economic growth and investments in infrastructure and services. And they need new international financial structures to enable long-term development.
