A wave of debt in emerging and developing nations has grown faster and larger than in any period of the past five decades and could end with another crisis, the World Bank warned on Thursday.
If the debt wave breaks, the crisis could be more damaging, as it would engulf private companies in addition to governments at a time when economic growth is sluggish, the World Bank said in a report that covers four debt surges from 1970 to last year.
“The size, speed and breadth of the latest debt wave should concern us all,” World Bank president David Malpass said in a statement. “Clearly, it’s time for course corrections.”
The World Bank and IMF have been sounding the warning about growing global debt for years, but the latest report is even more stark and turned up the volume on its calls for governments to take steps to prevent a crisis.
IMF Managing Director Kristalina Georgieva said that developing nations in Africa especially need to strike the right balance between financing development and a manageable debt level.
The IMF reported that total global debt rose to US$188 trillion at the end of last year, equivalent to nearly 230 percent of the world’s economy.
The World Bank report highlighted the “striking” debt surge, which is the “largest, fastest and most broad-based in EMDEs [emerging and developing economies] in the past 50 years.”
After declining during the 2008 global financial crisis, amid low borrowing costs in just eight years since 2010, debt in these countries climbed to an all-time high of roughly 170 percent of GDP, or about US$55 trillion. Much of the growth was incurred by China (equivalent to more than US$20 trillion), but Beijing also has become a large lender for low-income countries.
The report warns that the current debt wave “could follow the historical pattern and culminate in financial crises in these economies,” especially if interest rates spike or if there is a sudden global shock.
Better debt management, improved tax collection, flexible exchange rates and tighter fiscal rules to manage spending could help avert a crisis and soften the blow if one occurs, the World Bank said.
“Towering though it may seem, the latest global wave of debt can be managed, but leaders need to recognize the danger and move countries into safer territory in terms of the quality and quantity of investment and debt sooner rather than later,” Malpass said.
Georgieva in a blog post repeated her concern about the massive increase in commercial borrowing in Africa — accounting for 70 percent of the ballooning of debt.
She urged governments in the region to find a “balanced approach” to managing debt and development.
“Africa is seeking to find the right balance between financing development and safeguarding debt sustainability, between investing in people and upgrading infrastructure, between long-term development objectives and pressing immediate needs,” she said.
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