The Risks of Rising External Debt and IMF Warnings

The International Monetary Fund (IMF) consistently warns governments worldwide that external debt levels could rise more rapidly and sharply than anticipated. In its latest 2024 report, the IMF highlights that global debt might reach $100 trillion, equating to 93% of the world’s annual economic output. Without significant changes in fiscal policies, the growth of external debt could jeopardize economic stability and hinder the implementation of reforms essential for national development.

The IMF predicts that if fiscal policies remain unchanged, the pace of debt accumulation by major economies such as the United States and China will push global debt to $100 trillion, aligning almost entirely with the global economic output. Under some scenarios, this figure could climb to 115% by 2026, a staggering indicator of the debt burden on the global economy.

One of the primary drivers of this debt growth was the COVID-19 pandemic, which forced countries to spend extensively on healthcare, social support, and economic stimulus packages. Adding to this was Russia’s invasion of Ukraine, which triggered an energy crisis in Europe, requiring substantial compensation for high energy costs for households and businesses. As a result, debt growth has affected numerous countries, particularly major economies like the United States, China, Brazil, France, Italy, South Africa, and the United Kingdom.

The IMF stresses the need for reducing public spending and increasing taxes to curb debt growth. According to the fund’s calculations, stabilizing global debt levels will require reductions in expenditures and tax increases amounting to 3% to 4.5% of GDP. These measures exceed previous corrective actions, underscoring the depth of the issue and the urgency for timely and effective interventions.

The risks associated with rising debt extend beyond financial dimensions and have political implications as well. The IMF notes that fiscal policy uncertainty in the U.S. significantly impacts other economies, as their borrowing costs often depend more on U.S. policy decisions and Federal Reserve interest rate changes than on their internal conditions. This uncertainty amplifies the variability in debt costs and risks for other countries, threatening their economic stability.

Moreover, the IMF underscores the necessity of stabilizing and reducing national debt levels to allow governments the fiscal space to support energy transition projects, bolster military spending, and ensure care for aging populations. In countries like the U.S. and the U.K., there is room to increase taxes relative to their economic output. For instance, the IMF identifies opportunities in the U.S. to raise taxes on sales and high-income earners, channeling additional resources into the state budget. In developing nations, the focus is on improving tax collection and reducing the informal economy to generate more financial resources for public use.

The IMF’s warnings are not merely about identifying risks but also serve as a direct call to action. Governments must implement the necessary measures to ensure long-term economic stability and sustainable development. These measures, while challenging, are crucial to address the growing debt crisis and safeguard the global economy against future shocks.