Across the globe, the alarming surge in public debt has escalated into a pressing issue for international policymakers and analysts. The volume of public debt, commonly known as general governmental domestic and external debt, has nearly doubled over a span of twelve years. The United Nations Conference on Trade and Development (UNCTAD), now known as UN Trade and Development, unveiled its 'A World of Debt' report for 2024 in the first week of this month. The report revealed that public debt had soared to US$ 97 trillion in 2023, marking a growth of 6.10 per cent or $ 5.6 trillion from $91.40 trillion in 2022. In 2010, the figure stood at approximately $50 trillion. The report emphasized that global public debt is on a relentless upward trajectory, propelled by 'cascading crises as well as the sluggish and uneven performance of the global economy.'
The UNCTAD report also underscored the stark regional disparities in the growth of public debt, with developing nations witnessing a surge at a rate twice that of developed countries. In the past year alone, public debt in developing countries escalated to $29 trillion, constituting around 30 per cent of the total global debt. This ratio was a mere 16 per cent in 2010. However, there is a significant contrast among developing regions in terms of public debt. More than three-quarters of the debt is owed by countries in Asia and Oceania, compared to 17 per cent in Latin America and the Caribbean. The share of Africa stood at a mere 7 per cent.
Though public debt is a critical instrument for development as it enables the various governments to finance necessary spending and provides investment for multiple purposes, it may become burdensome for many nations due to excessive surges. Both internal and external factors may spark the surge. If the governments are unable to manage the spending or go for inefficient spending spree, it may compel the countries to borrow more, creating a burden of public debt. Debt servicing also becomes costlier, putting additional pressure on economies.
The anxiety regarding public debt is also reflected in the fiscal policy and sovereign debt conference in Tokyo in the first week of this month. In his opening remarks, Kenji Okamura, Deputy Managing Director of the International Monetary Fund (IMF), mentioned that the global debt is now around 93 per cent of the global GDP and is projected to reach around 100 per cent within five years. He also pointed out that though before the global health crisis, growing levels of public debt were a concern in many countries, public debts jumped significantly when the covid-19 pandemic, a global health crisis caused by the novel coronavirus, hit. To fight against the negative consequences of the pandemic, governments across the world provided vast amounts of fiscal support to households and businesses. It required higher borrowing from home and abroad.
Now, during a time of high interest rates, high debt means increasing costs of debt servicing that constrain fiscal spaces of many nations. And the situation is compounded by the medium-term growth prospects. UNCTAD report pointed out that the increase in global interest rates since 2022 further strained public budgets in developing nations as high-interest payments are outpacing the growth in essential public spending such as health, education, and climate action. It is estimated that the developing world is now home to 3.3 billion people, and one out of every three developing countries now spends more on interest payments than on human development, which refers to the overall well-being and quality of life of a nation's citizens.
Against the backdrop, the situation of Bangladesh deserves some attention, especially since the country is going through a tough time in economic management. Like many other developing countries, public debt is also gradually piling up in Bangladesh, and indication is also there that it may become a severe burden on the already stressed economy. According to the International Monetary Fund (IMF), the country's debt will likely increase to 42.6 per cent by 2027, rising from 37.9 per cent of GDP in 2023.
The rise in the debt-to-GDP ratio indicates that the country has to bear the burden of higher interest payments. The finance ministry already projected that interest payments are expected to increase from Tk 777.7 billion in FY22 to Tk 1,545 billion in FY27. As a share of the total budget, the ratio of interest payments was 15.3 per cent in FY22 and is likely to stay at the same level in FY27. Though the static ratio may comfort policymakers in the short term, the big surge in the actual amount will be a matter of concern. The projection shows that interest payment liability will almost double in five years. Moreover, the external interest payments will jump by 470 per cent during the period under review.
The recent Medium-term Macroeconomic Policy Statement 2024-25 to 2026-27, released in the first week of this month, has sounded an alarm. It points out that the majority of the external credits Bangladesh has received from its development partners have been on concessional terms. However, this trend is expected to reverse in the near future, highlighting the need for alternative fiscal management strategies.
"Because of the tight monetary policy adopted by the advanced countries since 2022, interest expenditure on foreign loans is gradually increasing," said the statement. It also pointed out that interest spending on external credits is expected to remain above 2 per cent of total expenditure in the medium term primarily for two reasons. First, reference rates in advanced countries are expected to be elevated shortly. Second, the country's graduation from the group of Least Developed Countries (LDCs) will gradually close the window for Bangladesh to get concessional loans from foreign sources.
In this new reality, the government document suggested a preference for domestic borrowing but noted that the proportion of external debt would gradually increase. "Overall, the rising debt levels call for careful fiscal management to ensure sustainability and to maintain a healthy balance between growth and debt servicing obligations," it added. This means there is no scope for complacency about public debt in the near future based on the country's first-ever Debt Sustainability Analysis (DSA) report. The report indicated that the country's public debt remains within safe thresholds, even under extreme scenarios. The government will conduct another DSA after the end of the current fiscal year (FY24). One has to wait for the updated report to know the level of complacency regarding public debt management.
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