High Debt, Low Growth: Navigating Fiscal and Financial Risks in the Global Economy

The Fiscal and Financial Risks of a High-Debt, Slow-Growth World

Abstract:

In the face of persistently elevated real interest rates, declining medium-term growth forecasts, and increasing public debt levels across advanced economies, advanced, emerging, and middle-income nations are encountering significant fiscal pressures. highlights that higher long-term real interest rates, alongside lower projected economic growth, exacerbate these fiscal pressures while posing risks to financial stability. Decisive action towards sustnable fiscal consolidation is essential to mitigate these dynamics.

Public Debt Sustnability:

The global landscape reveals a myriad of complexities when it comes to public debt sustnability. With the world grappling with unprecedented levels of debt following the COVID-19 pandemic and its associated economic downturns, concerns over long-term financial stability are mounting. Advanced economies, in particular, find themselves navigating an intricate balance between supporting recovery while ensuring fiscal health.

Fiscal Challenges:

Advanced economies have been at the forefront of this challenge, shouldering a significant burden due to their historical reliance on debt as a tool for economic stabilization and growth promotion. As interest rates rise, so too does the cost of servicing that debt, squeezing vital resources needed for public services, investment, and social welfare programs.

Financial Stability Risks:

The intertwining relationship between fiscal health and financial stability becomes increasingly precarious in this high-debt environment. Higher sovereign interest rates and potential market illiquidity create significant vulnerabilities within banking systems and non-bank sectors, particularly those with substantial holdings of government debt. This situation rses concerns about contagion effects on global financial markets, potentially impacting liquidity conditions worldwide.

Policy Imperatives:

The article underscores the need for policymakers to address these challenges through comprehensive strategies that prioritize fiscal consolidation without undermining economic recovery or creating further market instability.

Firstly, governments must embark on a gradual and credible fiscal reform process. This approach allows for steady reductions in public debt levels while the economy is experiencing favorable conditions and labor markets are strong. By doing so, policy rates can decrease more rapidly, mitigating negative impacts on economic activity.

Secondly, strengthening financial sector resilience should be prioritized through stress testing that adequately evaluates potential impacts of higher sovereign interest rates and market disruptions on banks and non-bank entities. Investments in market infrastructures to improve liquidity, trading efficiency, and price discovery are crucial for fostering a stable financial environment.

Thirdly, ongoing structural reforms can play an essential role in stabilizing debt dynamics by enhancing future growth prospects. These initiatives may include improvements in governance, tax systems, regulatory frameworks, and innovation policies that foster economic competitiveness and sustnable development.

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In , addressing the fiscal challenges posed by high-debt levels alongside sluggish growth requires a multi-faceted approach focused on both fiscal consolidation and financial stability reinforcement. A concerted effort from policymakers to implement these strategies will be essential in safeguarding the global economy's health and resilience agnst future shocks.

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This article is reproduced from: https://www.imf.org/en/Blogs/Articles/2024/03/28/the-fiscal-and-financial-risks-of-a-high-debt-slow-growth-world

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