Special Report: Governments in the red

NEW YORK - Feb. 24, 2023 - PRLog -- By: Tasha Wibawa, 360info in Melbourne

Government debt in developing economies has reached a record high of USD$98 trillion.

This is despite total global debt declining for the first time since 2015, driven directly by developed economies, according to a new report by the Institute of International Finance published on Wednesday.

"The external public debt burden of many developing countries worsened due to sharp losses in local currencies (in 2022) against the [US] dollar," the IIF told Reuters, adding that there is "no sign of imminent recovery".

Developing economies yet to recover from the COVID-19 pandemic are facing high-interest rates and a strong US dollar, making it more expensive to service their debt at a time when the price of food and energy is also growing.

Pakistan is one of those nations feeling the pinch. On the brink of a debt default, its Defence Minister, Khawaja Asif, said the country has gone "bankrupt".

Prime Minister Shehbaz Sharif announced cost-cutting measures including banning ministers from flying business class or staying in five-star hotels.

"It has also been decided to withdraw luxury vehicles from ministers … they will be auctioned where necessary," the PM said on Wednesday.

But short-term measures will only divert the current "fiasco", according to Pakistani economists Wajid Islam from the Khyber Pakhtunkhwa Technical Education and Vocational Training Authority and Junaid Ahmed, from Westminster International University.

"Stringent long-term structural reforms are what Pakistan needs to stay afloat," they said.

"The government has to grow its surplus by controlling expenditure, which is possible by introducing competitiveness, reforming the tax system, diversifying its export base, reducing the trade deficit and providing a suitable environment for investors, which will reduce the budget deficits and dependency on handouts."

Government debt itself isn't the problem, a degree of it is healthy for economic growth.

"More important than the raw magnitude of debt is its level relative to the size of the economy, as this ratio indicates a country's ability to service its debt," said Gigi Foster, economics professor at UNSW.

Countries unable to pay back or restructure their debts — often due to poor historical monetary policies — can result in economic collapse and political turmoil, largely seen in Sri Lanka in mid-last year.

Umesh Moramudali, lecturer at the University of Colombo, said Sri Lanka has made some progress with debt restructuring and private bondholders have shown a willingness to restructure debt.

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