Till debt do us part

The national debt level of a country is a measure of how much the government owes its creditors. Economists are generally divided on the question of how much debt is too much debt, both with respect to the ratio of debt to gross domestic product (GDP) as well as the total dollar amount of the debt. Some economists are concerned that excessive government debt levels can impact economic stability with broader implications for exchange rate stability, external trade, economic growth and unemployment. However, others suggest that if the debt level is manageable, there is little cause for alarm.

In the October 2021 edition of its World Economic Outlook Report, the International Monetary Fund (IMF) noted that the higher a country’s debt-to-GDP ratio is, the higher the risk of that country defaulting on its debt. In one of its studies, the World Bank also suggests that a debt-to-GDP ratio of 77% or more during prolonged periods of time can cause economic slowdowns.

In its 2021 World Economic Outlook Report, the IMF lists Japan as having the world’s highest debt-to-GDP ratio at 256.9%.

Following not far behind are Sudan and Greece, at 209.9% and 206.7% respectively. Of the countries with debt-to-GDP of over 90%, ten are in the Caribbean.

Of course, notwithstanding the conventional wisdom of the IMF and World Bank, there are many nuances that should be considered when talking about debt. For instance, Haiti has an enviable debt-to-GDP ratio of 25%. Yet, this has not resulted in economic stability for Haiti, perhaps mainly because of the decades of political and security instability in that country. Moreover, countries such as Guatemala, Chad, the Congo and many others have debt-to-GDP ratios below 50% but have yet to achieve appreciable levels of economic development. Therefore, economic success or lack thereof transcends debt.

The other issue to consider is that not all debt is equal. Some countries are in debt, especially unsustainable debt, due to poor economic management. However, for others, debt is sometimes the result of factors largely beyond their control. For instance, IMF figures suggest that the annual cost of disasters for small states is nearly 2% of GDP. In some instances, the impact of natural disasters on small states can be double their GDP. When added over many decades, it stands to reason that the vulnerability of small states to natural disasters would inflate their debt levels since these states must either borrow to rebuild or borrow to build resilience.

At least every decade, there is a global shock of some kind. In 2007/2008, it was the global financial crisis. Just over a decade before that were the terrorist attacks on the United States (US) and the subsequent wars in Afghanistan and Iraq which impacted global travel and tourism, energy prices and other sectors. Currently, virtually all states are working to combat the novel coronavirus (COVID-19) pandemic. Another reality of small states is that they tend to be hardest hit by these global events and also take much longer to recover. Therefore, while recovering from one crisis, they are often hit by another. These confluences of events frequently push governments toward incurring debt to shore up social safety nets, maintain employment levels, build infrastructure and generally, prevent a hard economic landing.

Greece is a recent case study of how debt can lead to a sharp and catastrophic economic calamity. However, this is an extreme example. While debt should not be ignored, narrative around it should also be balanced. For small states especially, the key is to focus on manageable debt and transformative debt. Manageable is about being able to repay. Transformative is about using debt to invest in resilient infrastructure, economic diversification and competitiveness, and to enhance the availability and delivery of public goods. The hope is that strategic investments in these areas would ultimately reduce the burden of having to borrow over time.

Joel K Richards is a Vincentian national living and working in Europe in the field of international trade and development.
Email: joelkmrichards@gmail.com