China played a central role in increasing global debt in recent decades as borrowing outpaced economic growth. Debt as a share of GDP has risen to about the same level as in the United States, while in dollar terms China’s total debt ($47.5 trillion) is still markedly below that of the United States (close to $70 trillion). As for non-financial corporate debt, China’s 28 percent share is the largest in the world.
Debt in low-income developing countries also rose significantly in the last two decades, albeit from lower initial levels. Even as their debt levels, especially private debt, remain on average relatively low compared to advanced and emerging economies, the pace of their increases since the global financial crisis has created challenges and vulnerabilities. More than half of low-income developing countries are in or at high risk of debt distress, and about one fifth of emerging markets have sovereign bonds trading at distressed levels.
Tackling debt vulnerabilities
Governments should take urgent steps to help reduce debt vulnerabilities and reverse long-term debt trends. For private sector debt, those policies could include vigilant monitoring of household and non-financial corporate debt burdens and related financial stability risks. For public debt vulnerabilities, building a credible fiscal framework could guide the process to balance spending needs with debt sustainability.
For low-income developing countries, improving the capacity to collect additional tax revenues is key, as we discussed in our April Fiscal Monitor. For those with unsustainable debt, a comprehensive approach that encompasses fiscal discipline as well as debt restructuring under the Group of Twenty Common Framework—the multilateral mechanism for forgiving and restructuring sovereign debt—when applicable is also needed, as noted in the April World Economic Outlook.
Importantly, reducing debt burdens will create fiscal space and allow new investments, helping foster economic growth in coming years. Reforms to labor and product markets that boost potential output at the national level would support that goal. International cooperation on taxation, including carbon taxation, could further alleviate pressures on public financing.
—Vitor Gaspar is director of the Fiscal Affairs Department, where Marcos Poplawski-Ribeiro is a deputy division chief and Jiae Yoo is an economist. This blog incorporates research by Youssouf Kiendrebeogo, Roberto Perrelli, Victoria Haver, Zhonghao Wei, and Chenlu Zhang.
