Analyzing the Impact of Covid-19 on Global Debt – IMF Report

Covid-19 is not only leading to unprecedented loss of human lives, it is leading to a huge economic cost too. Governments are borrowing extraordinary amount of money to make up for the lost revenue and to provide support to individuals and corporate. As per an IMF report, the recourse would lead to sharp increase in government debt to GDP ratio. Here is a look at some of the figures.

As per IMF fiscal monitor report released last month, government debt to GDP ratio is project to shoot up to 96%, up sharply from 83% in 2019. This corresponds to over $10 trillion of additional liability. The situation is going to be worse for advanced economies for whom the ratio would climb up from 105% to 122%. The ratio for these economies had stabilized at about this level over last decade after rising from about 75% before the 2008 global financial crisis. Among the countries with the worst ratio are Japan and USA with debt-GDP ratio projected to cross 250% and 130%. For Emerging markets & middle-income economies, the decline is still manageable from 53% to 62% whereas for low income group, this would move up from 43% to 47%.

As per the report, governments are facing twin challenges of sharp decline in revenue and even higher increase in spending. As per the report, government revenues can decline by about $2 trillion (~Rs 150 lakh crore) globally during the year. On the other hand, they are going to spend additional $3.3 trillion on healthcare and direct support to individuals. The severity of the impact can be gauged from the fact that projected additional spending alone is more than the GDP of India!

Other than this, governments are also required to provide support to companies through either equity infusion or credit guarantee where government has to pay up in case the concerned company defaults. Nearly $4.5 trillion is going to be allocated to this called ‘below the line’ measures in IMF parlance. Equity infusion has an interesting history as US government had provided huge amount of funds as equity during 2008 GFC including in automobile companies. After the crisis was over and markets rebounded, government sold-off its share earning significant return from its investments.

Despite such a sharp increase in debt, advanced economies, paradoxically, may not have to pay a huge price for this. Interest expenditure to Tax receipt ratio would rise somewhat marginally from 9.5% to 10.4% for them. This is so because these countries operate in an ultra-low interest rate environment with many countries operating with negative interest rate. Almost one-fifth of debt of these countries is having negative yields as per IMF. On the other hand, interest expenses to tax receipt would go up from 12.6% to 13.8% for middle-income group and sharply from 20% to 33% for low income countries. (sharp spike for low-income is due to a few outliers).

Among the countries incurring significant expenditure are USA, France, Germany, Italy, Japan, and UK, each projected to spend 10% of their GDP. US alone is expected to spend an unprecedented $2 trillion whereas Japan has announced package of $1 trillion, as much as 20% of its GDP. Among the stimulus measures are extended unemployment benefits, wage subsidies, targeted transfers to affected households and firms and support to hard-hit sectors such as tourism, hospitality services and travel. On the revenue side, measures include temporary deferral of corporate and personal income tax payments and social security contributions as well as temporary tax relief or exemptions. Not only government debt, even private – individual as well as corporate – debt may see a spike as a result of job losses, reduced pay at individual level and lower profits/losses at corporate level. Global debt (government and private) stood at $188 trillion or 226% of global GDP in 2018 according to the report.

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