That is, the trajectory of debt appears to be an important predictor of subsequent growth, buttressing the idea that the level of debt alone is an inadequate predictor of future growth. endstream endobj 1072 0 obj <>/Metadata 92 0 R/Pages 1065 0 R/StructTreeRoot 150 0 R/Type/Catalog>> endobj 1073 0 obj <>/MediaBox[0 0 612 792]/Parent 1066 0 R/Resources<>/ProcSet[/PDF/Text/ImageB]/XObject<>>>/Rotate 0/StructParents 0/Tabs/S/Type/Page>> endobj 1074 0 obj <>stream Figure 4: South Africa's External Debt Source: South African Reserve Bank The Domestic Debt to GDP ratio of Bangladesh stands at 19.55 percent taking the total Debt to GDP ratio to 31.42 percent on 31 March 2022. This suggests that high debt itself is not causing the low growth in these episodes. =KR?k&#K#Zz^s.C8D2GPOMttmU81G+$B3]HI06L~*|~h4ZwQC3/>q;ksqM{(_WP] X3 Fiscal deficits and public debt ratios (the ratio of debt to GDP) have expanded sharply in many countries because of the effects of the crisis on GDP and tax revenues as well as the cost of the fiscal response to the crisis. Rogoff (2010, 2012) argues that there is a threshold effect whereby debt above 90 percent of GDP is associated with dramatically worse growth outcomes. The scale is comparable only to the two 20th century world wars. The approach that Reinhart and Rogoff (2010) followed gave instead equal weight to each country independent of the number of years with high or low debt. 0 While it is possible that when the debt-to-GDP ratio exceeds 90 percent countries enter a state of distress that leads to a substantial reduction in growth, it is also possible that increases in public debt above 90 percent are driven by some other factor that reduces GDP and tax revenueswhich, in turn, leads to higher debt. Chart 2 shows the growth performance of the same episodes over longer horizons of 5, 10, and 15 years. Indeed, while there is some tendency for the debt ratio to shrink when it reaches particularly high levels, the process is extremely slow. We use three approaches: an intertemporal model of the current account that allows for capital controls; a composite model of macroeconomic indicators that yields probabilities of future balance of payments crises; and scenarios that examine the path of the . Thank you for this detailed story about Kashmir Sir, Govt should give reforms to People with car loan,person Kashmiri news as a whole does not affect us, since living ou Wow never seen someone taking about this so seriously.Keep i 2022 | The Right News. We augmented the IMF data with real GDP data from Maddison (2003) and other data from Reinhart and Rogoff (2010). as their debts remain below the threshold bounds of 40-55% of GDP. Debt Burden Thresholds and BenchmarksUnder the DSF. The Resilience and Sustainability Facility (RSF). To assess debt sustainability both risk signals from the framework and judgement are used. Please send your letters to fanddletters@imf.org, Receive emails when we post new Debt reduction, restructuring, and transparency needed to help low-income countries overcome debt challenges. Now available free on your iTunes store, Google Play, and Amazon! According to the report, Ghana's debt-to-GDP is projected to also reach 87.8 percent in 2023 while revenue captured as a ratio of GDP could hit 14.1 percent by the end of 2022. Sign up to receive free e-mail notices when new series and/or country items are posted on the IMF website. Maddison, Angus, 2003, The World Economy: Historical Statistics (Paris: Organisation for Economic Co-operation and Development). 20. $@tHs 8X$A!L0 ecY{!@4)4VF$l iF``a `e g@3\0 Sc Furthermore, there is no unique threshold that is consistently followed by a subpar growth performance. 65 (Ancona, Italy: Money and Finance Research Group). Furthermore, the right panel of Chart 3 shows that the initial debt trajectory remains important even after 15 years, with falling debt associated with higher growth. 2022 International Monetary Fund. In terms of thresholds, the results reveal that debt has positive effects on growth for countries with debt below 60 percent of GDP, negligible effects for countries between 60 and 90 percent, and . The debt-to-GDP ratio is the proportion of a country's government debt to its Gross Domestic Product (GDP). Its share stood at 45 percent while Russia accounted for 22 percent, China 21 percent, India and South Korea 4 percent each and France 2 percent. Save my name, email, and website in this browser for the next time I comment. debts. Debt Burden Thresholds and Benchmarks Under the DSF 80. The IMF and the (2011) find a debt threshold in the range of 35-40%ofGDP,while Chudik etal. Abbas, S. M. Ali, Nazim Belhocine, Asmaa A. ElGanainy, and Mark A. Horton, 2010, A Historical Public Debt Database, IMF Working Paper 10/245 (Washington: International Monetary Fund). 3 To put. Ht_k0)Xee,QJ9oi|}u\]Bl$,/bbEB!yf!s\Y,T=^B9/f7=iC5G~|?7 vJx/AAegX Do-c|w:%M5M7PbTp@(,\E{Z6gC en?DS@ ^(G8 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011. 57378. Countries with different policy and institutional strengths, macroeconomic performance, and buffers to absorb shocks, have different abilities to handle debt. To flag countries with significant public domestic debt, the framework also provides a signal for the overall risk of public debt distress, which is based on joint information from the four external debt burden indicators, plus the indicator for the PV of public debt-to-GDP ratio. A Critique of Reinhart and Rogoff, Political Economy Research Institute Working Paper No. debt-to-GDP ratio exceeds 60 percent of GDP, offsetting the downward pressure on long-term interest rates from higher market liquidity. (DSF) was introduced in April 2005 and is periodically reviewed. For example, the debt-to-GDP ratio in Japan increased from 133 percent in 1943 to 204 percent in 1944, and the subsequent growth rate in 1945 was 50 percent. Furthermore, we found that an economys debt trajectory still matters. The IMF Press Center is a password-protected site for working journalists. The effectiveness of the DSF in preventing excessive debt accumulation hinges on its broad use by borrowers and creditors. Asia and the Pacific Europe Middle East Sub-Saharan Africa Western Hemisphere A 5-percent discount rate has been used since 2013 to calculate the PV of external debt. This paper addresses the issue of threshold effects between public debt and economic growth in the Caribbean. modules that provide a richer characterization of debt vulnerabilities (from domestic debt and market financing) and better discrimination across countries within the moderate risk category. CI Debt-Carrying Capacity Assessing a Country's Debt-Carrying Capacity WEAK It is particularly striking for debt levels between 90 and 115 percent of GDP (for which average growth is percentage point higher). The episodes we considered occurred between 1875 and the end of the 20th century. Historical Patterns and Dynamics of Public DebtEvidence from a New Database. The DSF has enabled the IMF and the World Bank to integrate debt issues more effectively into their analysis and policy advice. Judged by a continental average of about 16% debt service to revenue ratio and 63% debt to GDP metric, one might be tempted to believe that the involvement of GSA is further evidence of the likelihood . Panizza, Ugo, and Andrea F. Presbitero, 2012, Public Debt and Economic Growth: Is There a Causal Effect? MoFiR Working Paper No. For example, despite mitigating the short-term reverse causality problems (in which low growth leads almost mechanically to higher debt), our methodology is unable to clearly identify the structural relationship between debt and growth. The framework focuses on the present value (PV) of debt obligations for comparability, as terms extended to LICs vary considerably and many are concessional. Nonetheless, the results were similar when we used a 10-year window. the countrys historical performance and outlook for real growth, international reserves coverage, remittance inflows, and the state of the global environment. The reserves 2 term is calculated as follows: (the ratio of reserves scaled by imports) 2 *100. Importantly, while higher debt is still associated with milder growth, there is no longer any clear debt-to-GDP threshold above which growth deteriorates sharply. Third, the absence of a specific debt threshold above which growth prospects are severely impaired means that economies can focus on the net medium-term effects of stabilization policies rather than worry that a short-term excursion above a particular debt threshold will lead to large and negative results. Under the DSF, debt sustainability analyses (DSAs) must be conducted regularly. Debt Burden Thresholds and Benchmarks Under the DSF. Comparing Developed and Emerging Markets But what about countries that have a high, but falling, debt ratio? compared to the 2018 DSA. The latest quarterly Debt Bulletin issued by the Bangladesh Ministry of Finance on Thursday reveals that its total external debt went up from 4.20 lakh crore Taka at the end of the last financial year on 30 June 2021 to 4.71 lakh crore Taka as on 31 March 2022. hbbd``b`N@`z$X@Dx {D3#~# y Reality is that Kenya is already in debt distress; the recent Institute of Economic Affairs (IEA) Budget Focus Report notes that even though Kenya has not broken the public debt-to-GDP threshold . . Thresholds corresponding to strong performers are highest, indicating that countries with good macroeconomic performance and policies, can generally handle greater debt accumulation. Given that the sample encompasses two world wars and the Great Depression there is rich historical experience, but it also includes many unique circumstances that need to be borne in mind when analyzing the results. endstream endobj startxref Debt Coverage 1 debt t the ysis 2 in 1. In this way, the framework should help LICs raise the finance they need to meet the Sustainable Development Goals (SDGs), including through grants when the ability to service debt is limited. . Relative to the 1-year horizon, performance is less affected by higher debt at the 5-year horizon and much less affected at horizons of 10 and 15 years. endstream endobj 1075 0 obj <>stream We first focused on the short-run association between debt and growth, an approach similar to Reinhart and Rogoffs. At the least, this suggests that the debt level alone is insufficient to explain the growth potential of an economy. There are four ratings for the risk of external public debt distress: In addition to the risk ratings signaled by the framework, the use of judgment may be needed to arrive at a final risk rating. 'Research by the IMF shows that once a tax-GDP ratio gets above around the 15% threshold, this creates a platform for investment,' says Chris Morgan, KPMG's global head of tax policy. The proportion of domestic debt was 62 percent. 59, No. What this suggests is that the effect observed at the 1-year horizon is temporary and, as such, much more likely to be indicative of poor growth leading to high debt than high debt leading to poor growth. Furthermore, as suggested by the degree of uncertainty captured by the shaded area, these results are relatively fragile and unduly influenced by outliers. Influential papers such as Reinhart and Rogoff (2010) and Reinhart, Reinhart, and Rogoff (2012) argue that there is a threshold effect: when debt in advanced economies exceeds 90 percent of GDP there is an associated dramatic worsening of growth outcomes. Every percentage point beyond this threshold has been found to detract 0.017 percentage points from annual growth. According to the IMF's Global Debt Database, borrowing jumped by 28 percentage points to 256 percent of gross domestic product in 2020. The debt-to-GDP ratio is the ratio between a country's government debt and its gross domestic product (GDP). The estimations establish a threshold of 77 percent public debt-to-GDP ratio. 3, pp. In fact, Chart 4 shows that economies with a debt level between 90 and 110 percent of GDP outperform their peers when debt is on a declining trajectory. Bangladesh Ministry of Finance has allayed fears on account of its external debt by pointing out that its external debt to GDP ratio stood at 11.87 percent compared to the IMF mandated threshold of 40 percent. Reinhart, Carmen M., and Kenneth S. Rogoff, 2010, Growth in a Time of Debt, American Economic Review, Vol. At the same time, the shaded area in Chart 1which captures the degree of uncertainty around our estimatesreveals considerable diversity in the growth performance for countries whose debt rises above 90 percent. Risk signals are derived by comparing debt burden indicators with the indicative thresholds above, over a projection period. On the contrary, the association between debt and growth at high levels of debt becomes rather weak when the focus is on any but the shortest-term relationshipespecially when compared with the average growth performance of country peers. As emphasized in Herndon, Ash, and Pollin (2013), different weighting can potentially lead to significantly different conclusions about the presence of a clear threshold effect. 71742. Furthermore, we found evidence that the relationship between the level of debt and growth is, importantly, influenced by the trajectory of debt: countries with high but declining debt have historically grown just as fast as their peers. Furthermore, there is no unique threshold that is consistently followed by a subpar growth performance. It expects the ratio to hit 275 per cent for the whole of 2020. 1071 0 obj <> endobj Whether there is such a tipping point is of critical importance not just because of the historically high level of public debt in many advanced economies, but also because of its implications for debt accumulation in all economies. 100, No. The choice of this long period for our study reflects the fact that debt reduction is typically a long, drawn-out process. It is an increase of over 12 percent within 9 months of FY 2022. There is no agreement on the issue among researchers. A report by the African Economic Outlook revealed that the 60% debt-to-GDP threshold established by the African Monetary Co-operation Program (AMCP) was exceeded by a total of 6 African . 100. The IMF said this in the October 2021 Fiscal Monitor Report published on its website. The framework is designed to guide the borrowing decisions of LICs in a way that matches their financing needs with current and prospective repayment ability. The nation's debt-to-GDP ratio rose to 266.4 per cent at the end of the third quarter in 2020, up from 245.4 per cent a year earlier, according to the Chinese Academy of Social Sciences (CASS), a State Council-affiliated think tank. This paper explores the debt threshold for fiscal sustainability assessment for 14 emerging economies during the period 1999-2016. Last Updated: Given that concessionality is an important element in financing LICs, the debt concept used in the template focuses on the present value (PV) of debt. By the end of 2020, economists expect global debt to reach $277 trillion, or 365% of world GDP. The stock of debt linked to private public partnerships (PPPs) is less than 3 percent of GDP.
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