The beginning of a new year over last many decades would not have been so depressing as this. Covid-19 continues to wreak havoc in terms of lives and livelihood lost and it is still not certain whether and when the large-scale vaccination drive would have an impact in containing this. The pandemic has also impacted the fiscal position of government across the world to an extent not seen since the second World War, as per the latest IMF report. Here is a look at the details.
As per the latest IMF fiscal monitor report, government debt is projected to shoot up to 98.7% of global GDP, up sharply from 83% in 2019. This corresponds to over $12 trillion of additional liability. The projection has been sharply revised upwards from 96% in April’20. The situation is going to be worse for advanced economies for whom the ratio would climb up to 126%, up from 105% in 2019. The ratio stood at about 75% before the 2008 global financial crisis which means it took government nearly 30% additional debt to stabilise their economies. In all likelihood, the pandemic would eventually require more than that to normalize economies this time. The debt level carries greater significance as it breaches the highest level of 124.1% recorded so far in 1946, just after the WWII, as per the IMF data. Among the countries, Japan and USA are the worst with debt-GDP ratio projected to reach 266% and 131%. For Emerging markets & middle-income (EMMI) economies, ratio would increase from 53% to 62% whereas for low-income group, this would move up from 43% to 49%.
The extraordinary increase is happening because of double whammy of significant decline in revenues and an equally sharp increase in expenditure. As per the report, government revenues are projected to decline by about $2.8 trillion (~Rs 200 lakh crore) globally during the year. On the other hand, they are going to spend additional $3.6 trillion on healthcare and direct support to individuals. The severity of the impact can be gauged from the fact that additional spending alone is almost 25% more than the GDP of India!
Other than the direct expenditure, governments are also having 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. It may be noted that 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.
The twin impact is getting reflected in higher fiscal deficit of governments which is projected to be 12.7% of global GDP, almost four times the average deficit of 3.3% during 2012-19. Biggest spenders are Canada, USA, and UK recording deficit of 19.9%, 18.7% and 16.5%. Deficit of Canada is even more pronounced as it had recorded average deficit of barely 0.3% in preceding seven years. For EMMI economies, the deficit is 10.7%; less pronounced not because these countries are less impacted but because they have limited resources and are, therefore, cautious in their spending. Low-income countries are equally constrained with their deficits going up to only 6.2%.
The extraordinary increase in spending leads to challenge in resource mobilization, as domestic savings are not sufficient to meet such needs. In these exceptional times, governments are having to resort to ‘deficit financing’ or ‘printing’ of money, increasing their liability to the central banks. As per the IMF report, central banks’ share in total government borrowings this year is as much as 75% in Japan, 71% in EU, 57% in USA and 50% in UK. While printing of currencies carries the risk of run-away inflation, these economies can afford to take this risk as they have very low level of inflation currently. Ironically, all this money is eventually flowing into stock market or other speculative investments. NASDAQ has risen by almost 90% from the lows in March’20 and almost 40% from Jan’20, pre-Covid-19 level. Not only the domestic market, markets across the world are witnessing sharp increase in foreign currency inflows and thereby, rise in stock market indices. Sensex has risen by close to 70% since the March’20 lows and 20% since Jan’20.
Despite such a sharp increase in debt, paradoxically, advanced economies may not have to pay a huge price for this. Interest expenditure to tax receipt ratio would rise somewhat marginally from 9.5% to 10.8% 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 14% 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).