BAKU, Azerbaijan, August 1. High pre-COVID-19 pandemic debt levels could imply that the additional debt surge will constrain economic activity globally over the next years, Trend reports via the latest working paper from the International Monetary Fund (IMF).
“The large marge in corporate and public debt during the pandemic raises concerns that it will damage growth prospects in the years ahead. However, it is not clear the impact will be necessarily negative. The rise in debt as a response to the economic crisis allowed to find programs to save lives and businesses and could reduce scarring allowing for a stronger economic recovery”, the paper said.
The results of the research show that output is constantly declining after the overall growth of debt, but the nature of growth depends on various factors, including the type of debt growth and initial macroeconomic conditions. The worst indicators of economic growth are especially noticeable among the sharp increase in public debt. Although, a sharp increase in private debt is also usually associated with a decrease in potential GDP.
“The effects of debt surges depend to some degree on the initial economic conditions, but not always on the expected way. The negative impact of public debt surges on future growth is more pronounced when the economy starts from a stronger cyclical position (large positive output gap),” the report noted.
According to the report, a sharp increase in both corporate and public debt is followed by a significant reduction in public and private investment. This suggests that firms and governments reduce investments when they are experiencing financial difficulties. A sharp increase in public debt also has a negative impact on private and public consumption. This may be because governments are cutting spending and raising taxes after a sharp rise in debt, or because households are limiting their spending for fear of future tax increases.
“Overall, the results further strengthen the call for prudent policies and building buffers to manage large shocks, like the COVID-19 pandemic. Countries with initial lower debt levels are in better shape to increase borrowing in a crisis without jeopardizing future growth. The results also strengthen the case for governments to monitor and prevent excessive debt surges and leveraging by the private sector,” the report concluded.
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