Trickle down effect of US borrowings
If you thought excessive indebtedness was a Pakistan-only problem, you were mistaken. Global public debt, both domestic and external, continues to increase rapidly, driven by cascading crises, as well as sluggish and uneven performance of the global economy.
It hit a new ‘milestone’ last year: a staggering $97 trillion, up from $91.4tr in 2022 and $50tr in 2010. And more than a third of that comes from one country: the United States.
The world’s largest economy has accumulated nearly $35tr in debt to finance its growing expenditures and soaring fiscal deficit. The US debt is so large that the International Monetary
Fund (IMF) has sounded multiple warnings in recent months that growing US debt is putting the entire global economy at risk.
For perspective, according to a new United Nations Conference on Trade & Development (UNCTAD) report, ‘A world of debt 2024: A growing burden to global prosperity’, the US debt is now more than the combined economic output of China, Germany, Japan, India and Britain. It is also substantially bigger than the combined public debt of $29tr in developing countries.
Pakistan’s general government debt of $260.9 billion, or just 0.3 per cent of the total global debt, is peanuts in comparison.
The problem is that Islamabad is unable to service it without taking more loans due to low tax-to-GDP ratio and growing trade deficit due to shrinking exports.
America’s exorbitant debt profile sparks concerns as IMF warns of adverse global impacts, especially on developing nations who struggle with debt servicing. The UNCTAD report highlights that debt in developing countries now accounts for 30pc of the global total, a substantial increase from a 16pc share in 2010, reflecting rapid growth.
The burden of this debt varies significantly with countries’ ability to repay it and is exacerbated by the inequality embedded in the international financial architecture: those least able to afford it end up paying the most.
Meanwhile, repaying debt has become more costly, and this is hitting developing countries disproportionately. In 2023, developing nations paid $847bn in net interest, a 26pc increase from 2021. They borrowed internationally at rates two to four times higher than the US and six to 12 times higher than Germany.
The rapid rise in interest costs is limiting budgets in developing countries. Currently, half of them designate a minimum of 8pc of government revenues to debt servicing, a number that has doubled in the last 10 years.
In April, the IMF said in its benchmark Fiscal Monitor that massive US fiscal deficits (estimated to reach $2tr this year) and consequent debt accumulation have stoked inflation and pose “significant risks” for the global economy.
IMF chief economist Pierre-Olivier Gourinchas said the US’ fiscal position was “of particular concern”, suggesting it raises longerterm fiscal and financial stability risks for the global economy.
IMF’s First Deputy Managing Director Gita Gopinath said while high deficits are supporting growth in the US and globally, there is a downside. “Along with that growth, you’re getting higher interest rates and a stronger dollar and the second two are creating more complications for the world,” she told the IMF at the World Bank Spring Meetings.
While economic indicators and recent turmoil in financial markets may not technically constitute clear signs of a recession, risks in the US economy and its financial markets are said to be building up. These risk factors pose a threat to its own financial stability and that to the world from multiple aspects.