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IMF warns: Higher private debt levels to have impact

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Expect spending by poorer households and heavily indebted private sector firms to fall, resulting in slow economic recovery over the next three years, the International Monetary Fund (IMF) has warned.

According to economists in the World Economic Studies Division of the IMF’s Research Department, global private debt has risen by about 13 per cent of the world’s gross domestic product (GDP) in 2020, which was faster than the rise during the global financial crisis.

They warned that the growing debt levels could result in several consequences including sharp cuts to consumption and less spending on investment in the future, as they urged governments to take a measured approach in removing support measures.

“We estimate that recent levels of leverage could slow economic recovery by a cumulative 0.9 per cent of GDP in advanced economies and 1.3 per cent in emerging markets on average over the next three years,” said the economists.

“Our analysis shows that the post-pandemic drag on growth could be much larger in countries where indebtedness is more concentrated among financially stretched households and vulnerable firms, fiscal space is limited, the insolvency regime is inefficient, and monetary policy needs to be tightened rapidly,” they said.

The IMF economists also warned that low-income households and firms that are highly indebted, unprofitable and are struggling to make interest payments, were typically less able to withstand a high level of debt.

“As a result, they are likely to make sharper cuts to consumption and investment spending in the future. The drag on future growth is therefore expected to be greatest in countries that experienced the largest increases in indebtedness among low-income households and vulnerable firms during the pandemic,” they indicated.

They pointed out that though governments succeeded in lessening the economic pain of the pandemic by providing a lot of liquidity, it did not stop the spike in private debt. They said “careful, real-time monitoring of the balance sheets of low-income households and vulnerable firms is key to calibrating the unwinding of support measures. This could prevent sudden distress when financial conditions tighten.”

The researchers indicated that the impact of the pandemic on the finances of households and firms was varied across countries and would require varying policy responses.

While no data was provided on the Caribbean, the IMF economists noted that vulnerable firms or those highly concentrated in contact-intensive services such as tourism and hospitality, entertainment and food and beverage, often borrowed to survive the drop in revenues caused by the pandemic.

They noted that this would therefore result in future investment to be lower in countries that depended heavily on those sectors. They warned that as economies recover and inflation rise, governments should take account of the impact of fiscal and monetary policy tightening on the most financially stretched consumers and businesses.

“To prevent rapid tightening of monetary policy from causing large and potentially long-lasting disruptions, policymaker should pay close attention to adverse developments in the financial sector,” they said.

“This is especially important in countries where a wave of bankruptcies in sectors heavily hit by the pandemic could spill over to the rest of the economy. Governments in these countries could incentivise restructuring over liquidation and, where necessary, extend solvency support,” they recommended.

marlonmadden@barbadostoday.bb

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