Debt and why governments should reduce it will be at the center of this week's annual meetings. IMF and World Bank in Washington.
Finance ministers and central bank governors from around the world will meet in the US capital with think tanks and philanthropic capitalists to discuss the state of the global economy and its potential to create higher standards of living.
Rachel Reeves is among those who have been told to start paying off debts accumulated during the crisis years from 2020.
The IMF is expected to say the mountain of debt is out of control. The United States and China have borrowed heavily to turn their economies after the 2008 financial collapse, returned to bond markets during the pandemic and supported households and businesses hit by a recent inflation shock. European countries that traveled the same route include England and France.
All of them have been reprimanded by the IMF for allowing public debt to rise to 100% of annual national income.
The UK is among countries such as Brazil, France, Italy and South Africa whose debt is expected to rise without a concerted effort by ministers to reverse the trend. These are countries where underlying demands for greater spending on welfare and health can easily skyrocket, says the IMF.
In a research-based warning that debt levels could escape politicians without tougher measures, he said: “Future debt levels may be higher than planned, and stabilizing or reducing them would require much larger fiscal changes than planned. at the moment. “Most likely.”
As a point of reference, the ratio of debt to national income or gross domestic product (GDP) is the most popular measure of debt sustainability. Italy's debt-to-GDP ratio is over 130%, while the US rate is 124%. Greece's rate is around 160% and Japan's rate is even higher at 260%.
The IMF predicts that global public debt will exceed $100 trillion by the end of the year.
The UK chancellor will go to Washington with a relatively low debt-to-GDP ratio. It has recently exceeded 100%. That saves it from the wrath of the IMF, but it is still vulnerable to accusations that the UK is not doing enough to support it. Developing countries are crippled by debt.
Poorer countries tend to have lower debt-to-GDP ratios, burdened by stratospheric interest rates, which means higher borrowing costs relative to tax revenues.
World Bank chief Ajay Banka will try to shift rich countries' approach to the debts of poor countries, many of which struggle to pay monthly interest payments.
According to a report by anti-poverty charity Development Finance International (DFI), debt servicing costs absorb an average of 42% of costs in the 146 countries on the World Bank's Least Favored Countries list. and 55% in Africa. The DFI complains that these countries should use tax revenue to pay interest used to improve basic health and education services and address the climate crisis. The alternative is to generate new debt to pay existing obligations.
After newsletter promotion
In a press conference ahead of the meetings, Banga said debt cancellation is a difficult process as most loans are complex and multi-layered. He said some of the worst-affected countries were negotiating to obtain debt relief, but it was a long and difficult road.
However, it said the goal should be debt forgiveness and that it was working on ways to ease servicing costs to improve growth outcomes.
Banka said the bank has already responded to calls for debt relief to play a role in the restructuring by providing billions of dollars in additional grants and discounted loans to debtor countries.
Between $16 billion and $17 billion have been allocated to debt restructuring processes for Zambia, Chad, Ethiopia and Ghana.
“Effectively, what we're doing is giving them the lifeline they need, whether it's loan forgiveness or giving them a grant,” Banga said. “Debt forgiveness is needed, but not ours. It is required of those debtors. This is the question we are trying to resolve.
Reeves will be asked to play a role in providing more resources to poor countries after years of cuts to international aid by the previous Conservative government. But with the budget and the Labor Party under pressure to spend every penny on appeasing the likes of the IMF to reduce their debts, the Bank could be disappointed.
