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Hello, I'm Ne Parker. This is Counter the Coster, your weekly look at the world of business and economics. This week, nations are drowning in debt. The world could soon owe more than it earns. But when does borrowing become too much, and how would that affect us all?
Debt crises have mostly hit poorer nations the hardest. But today, some of the richest countries are borrowing at alarming levels. Is their debt now at risk of spiraling out of control? Debt is rising, and so is the cost of servicing it. Markets are already on edge. Could this trigger the next financial crisis, or will governments get their house in order?
Governments around the world now owe nearly a hundred trillion dollars in public debt. That's almost double what they owed just a decade ago. The International Monetary Fund warns that by 2029, global debt will surpass 100% of the world's GDP, meaning the world's borrowing could soon exceed the size of the entire global economy. That threshold could be crossed much sooner if economic growth slows or interest payments are higher than expected.
But there's a stark contrast. Richer nations can, for now, still borrow at lower costs and keep spending, while many poorer nations are running out of room to take on more debt. But when borrowing becomes too big, who pays the price? We will discuss this with our guest shortly. But first, let's take a look at why governments borrow in the first place.
Governments borrow to fill the gap between public spending and the money raised from tax revenue and other income. They borrow from global institutions like the International Monetary Fund and the World Bank, from other countries, and from commercial banks. They also raise money by selling bonds, often to institutional investors or pension funds.
Borrowing is usually sustainable when interest rates aren't too high or when the loan is used to generate more income and create long-term economic growth. However, it can be a problem when loans grow faster than a country's economy and when a government can only afford to cover the interest on its debt with no economic return. And that's becoming a global issue, including in some of the group of seven richest countries. The United States, France, and the United Kingdom have the biggest problems. All three have a deficit between what they spend and what they bring in through taxes.
Global institutions are now warning the world's debt is reaching dangerous levels and could soon spiral out of control. Governments may find themselves obliged to raise taxes or cut spending to repay loans. But this doesn't go well with voters. Until recently, debt distress was largely a crisis in developing nations, with at least 55 countries struggling to meet their obligations. But now, some of the wealthiest nations could also be at risk.
Embra reports. World debt is skyrocketing. The International Monetary Fund says the sum of all government debt is on course to hit more than 100% of the world's gross domestic product, or worse.
"In an extreme but plausible scenario with a 5% uh probability that would reach 123% of GDP uh in 2029. So truly very high level."
This would be the highest level since 1948, after World War II. The IMF says governments need to act now.
"It's very important to prioritize fiscal policy right now to ensure uh debt sustainability and prepare fiscal buffers, ensure fiscal space to use in case of severe adverse shocks, including uh the eventuality of a financial crisis."
Government debt was thought of as a burden for lower-income countries. Now, some of the richest countries in the world have a debt problem. The US has the biggest economy in the world and the biggest debt at $38 trillion. That's 125% of its GDP. Major economies, including France, the UK, and China, also have huge debt. Borrowing ramped up during the COVID-19 pandemic when interest rates were lower, but they've since risen, and so is the cost of the debt. The IMF says governments need to change what they're spending the money they've borrowed on.
"Do the structural reform and the productivity enhancing measures because they will not only increase your income, they will also be a considerable contribution uh to the fiscal adjustment effort."
Many countries are bolstering defense budgets, despite this not bringing revenue. Economists say increasing public spending for education and infrastructure could boost economic growth. Although historically, IMF loans have come with conditions of cuts in public spending, and some economists say boosting economic growth may not be a realistic plan.
"The best thing that one could do uh would be to increase GDP, to increase economic growth. The problem with this that it's very hard to increase GDP growth. So the other alternative is to reduce the deficit. And to reduce the deficit, you uh either need to collect more taxes or you need to cut uh public expenditure."
But this is usually unpopular with the electorate. However, it's still lower-income countries that suffer the most under the burden of debt. Debt ratios to GDP are lower in poorer countries, but interest rates are higher, and creating a fiscal buffer is harder.
"Why should an African country be so expensive as compared to its peers in other parts of the world? Why should it be? Why should the risk premium for African countries be so different from Europe, America, and other parts of the world?"
Activists say what's known as the Common Framework, that's the plan the IMF sets out for repayments by lower-income countries, needs to be restructured. But what economists, activists, and lenders agree on is that the current system of global borrowing and spending is pushing the world towards a financial crisis. And the longer it takes to reform, the higher the cost for everyone. Imagining Kimber, Al Jazeera for Counting the Cost.
Well, let's discuss this further with our panel of guests. Joining us from London is Anne Pedaphor. She's the director of Prime Economics, which focuses on policy research into macroeconomics. In Singapore, we're joined by Alex Holmes. He's the regional director for the Asia-Pacific at the Economic Intelligence Unit, a business research and analysis group. And in Accra, we're joined by Daniel Amate Ani. He's the chief economist at the Policy Initiative for Economic Development in Africa, an economic and policy think tank. A very warm welcome to all three of you. Welcome to Counting the Cost.
So, an, global public debt is expected to rise way above 100% of the world's economic output by 2029. These are clearly more than dry numbers. Why should ordinary people around the world care?
Um, well, first of all, I want to begin by saying that debt is not in itself a bad thing, and that we need it to finance activity. And that, you know, we could, the question is whether or not we're investing in economies in order to generate the income needed to repay the debt. And the debt, though high in advanced economies, is actually rather sustainable in those economies, even when they arrive at about 100% of GDP. But in low-income countries, where the debt is often in foreign currency, those high levels of debt are excruciatingly painful for those economies. They are actually resulting in, I think, widespread degradation of health and of social welfare. So it's a crisis for low-income countries far more than it is for high-income countries. Um, and for high-income countries, it's a function of economic weakness, of economic failure. And that failure derives in the first instance from the great financial crisis 2007-9, from which we, many of rich countries, have not fully recovered, including my own. And then, of course, that was compounded by the COVID pandemic. So these are big crises that have hit the global economy. And instead of responding by investing and encouraging more economic activity, countries went into austerity mode, and that made things a lot worse in economic terms.
Daniel, turning to you, debt is a double-edged sword, says an. Your thoughts? You know, when it comes to, uh, debt, especially with, uh, developing economies like my own, Ghana, you know, it's a very huge issue because we spend almost about 65 to 70% of our revenue in servicing debts. And what it means is that we have sacrificed other sectors of the economy to the extent that, uh, repayment obligation is even more than budgetary allocation for health and education. So the big question is that how do you then develop your economies? Now, uh, we, because most of the debt contracted are in dollars or foreign currencies, so to speak, there is what could be described as a currency risk. And any time the economy is unable to generate sufficient revenue to be able to meet repayment obligation, then we have an issue. Let me use Ghana as an empirical example, where it got to a point we were unable to meet our repayment obligation, and the only way out is to resort to the IMF bailout in order to get some, you know, credit credibility in the eyes of the investor community. We've gotten to a point where the economy couldn't generate sufficient inflow principally because most of these facilities that were contracted, okay, were used for the purposes of consumption, were not invested into the rich sectors of the economy to be able to generate sufficient inflow to meet repayment obligation. As much as I agree that debt in any is not bad for Africa, it is the management of same, okay? So that is the, that's the difficulty we have in the ability of the African economies to manage debt. So debt sustainability is very key. As long as they could go to the capital market to borrow, they keep on rushing borrowing without necessarily doing the analysis to ensure whether they'll be able to to meet repayment obligation.
Turn to you, Alex. Uh, Daniel's made it clear that any loans need to be very, very wisely invested for this balance to to work well. I mean, what does global debt outstripping economic output globally mean in your part of the world?
Yes. So debt is one of those subjects that's filled with big, scary numbers, but I think, as, as an and has alluded to, you know, it requires a lot of nuance in in talking about what actually means it means for sustainable debt. It depends what you invested, uh, into and whether that delivers a return. It depends on whom you owe the debt to, and it also depends on your cost of servicing the debt and what those interest rates are. Um, two, two of the big countries that that that are often raised in in my region, um, with concerns to debt are Japan and China. And if you're looking for kind of the next big debt crisis to emanate from these two countries in 2026, it's, it's probably not going to happen. There's a number of reasons for that, but that doesn't mean that it's not a problem in these two countries. And, and one of the big underlying issues with these two countries is also actually the revenue that's needed to service these debts and the underlying demographics in these two countries. That means that debt is going to become an increasing problem.
And turning to you, because many rich countries borrow heavily without any real immediate fear of default. Why can countries like the United States, the UK, and France and Japan live with such high debt while other nations can't?
So, I mean, Japan's a very interesting case, uh, in the sense that actually most of the debt owed is owed to domestic lenders. Um, and so therefore, that's why Japan has debt which is more than 200% of GDP and it's not a problem. The real problem is why countries have been persuaded, countries in Africa in particular, to borrow from private lenders in the international capital markets. That's the biggest, that's the big problem. Um, the IMF has encouraged countries not to develop their own monetary systems and their own economic systems to be, if you like, autonomous in their financing of economic activity, but instead, they've been persuaded to borrow from private bond markets at very high real rates of interest. Rates of interest which I think are a form of usury. They are highly exploitative and extractive, and the IMF is happy with that. In fact, I know that the IMF more or less endorsed and sometimes guaranteed, uh, borrowing by low-income countries, including countries like Ghana, from private lenders, from the private bond markets at very high real rates of interest.
I wonder if you could underscore why, why do you think the IMF is happy with that? Because, you know, the way the international financial system works is that it's effectively being privatized, and and and private lenders want to be able to lend to governments. It's the safest form of lending because even if that government were to default and not pay her debts, the IMF and the World Bank are there to back up those creditors. So the IMF acts as a sort of gatekeeper for private creditors, for Wall Street, if you like. And, and we, and as opposed to the years between 1945 and 1971, when countries raised their money domestically at a domestic level and were discouraged from, and where we did not have the US dollar as the world's reserve currency, just as that, you know, the system has been changed and oriented towards the interests, if you like, of Wall Street, and African countries have fallen for that. They should not be doing that.
Right. Well, let me put that, and let me put that to to Daniel. So, the message from an is debt is not a bad thing, but the wrong kind of loans that are exploitative are, uh, how does that affect people across the continent of Africa? Daniel, because for many developing countries, the debt crisis isn't a future risk. It is here now. What does the debt crisis look like for ordinary families in in Africa, and indeed Asia and Latin America for that as well?
Yeah, thank you very much. And I largely agree with an in that in her summation, you know, because we borrow at a very high, you know, interest rate, and our economies are not in a position to be able to generate sufficient inflow to meet repayment obligation. And another key area to, to my mind, which is also worth considering is that, uh, we borrow largely for consumption. And if you borrow for consumption, you are unable to pay because you are supposed to generate internal revenue for consumption. If you borrow, you need to invest it into the rich sectors of the economy that have a ripple effect to anchor your economy. Another key area that is affecting the economies of Africa is mismanagement and corruption. Okay? Mostly we borrow this managed at the point where we are heading towards election, and such money are pumped into elections just to win political power. So as much as the high interest rate stipulated by an is a key factor, another factor which is internally generated has to do with mismanagement and corruption by African, uh, leadership in terms of the management of the managed that are borrowed. They are not really invested into sectors that will support the economy. It is not used to support the private sector, uh, to increase productivity, to create jobs and opportunity to be able to generate sufficient inflow to support the overall economy. So what it does is that because government is now using that money to meet repayment obligation, government is unable to support education as, as expected, is unable to support health as expected. Government is unable to cater for basic infrastructure facilities, and the citizens are further asked to pay more taxes. So the cost of living is very high in almost every African economy, and job creation is at the lowest level, and it's affecting the youth. And that's the reason which most youth in Africa, as much as they have the desire to to establish their own enterprises, you see them now resorting to Europe and other Western countries. So these are the effects of of high debt, uh, on the economies of Africa.
Um, Alex, just turning to, um, East Asia. I mean, China, one of the world's biggest economies. Is there something special about China, the way it's economically insulated, the way it's economically structured that makes it impervious to this, these perhaps these exploitative loan systems and the way it handles debt?
Well, I wouldn't say that it was impervious to exploitative loan systems, and it does, of course, um, not really borrow much from from the rest of the world. So, in fact, it it's become a big net lender. So, ever since 2013, when when the the Belt and Road Initiative was, um, kicked off and and it reached its peak prior to the pandemic and wound down, but has been picking up again since that, China has been a big lender to the rest of the world, particularly the emerging world. Now, much of the awarening world was very happy with this. Chinese loans didn't come with the strict conditionality. It didn't come with the lecture. Um, but the problems which which David talked about in terms of governance, um, were still there, and many, many pe many countries took on loans, and many governments took on loans, and they they became conduits for graft, and these, they they were fed into big projects that became white elephants and didn't produce a return in order to service that debt. Now, that's not true universally, but it is true in many cases. And so, so Chinese lending has has kind of been a hot button topic, and and some of it is really helping emerging economies to develop and and is coming along with with skills and and infrastructure and know-how, and some of it is repeating the old mistakes that that an talks about that have traditionally come from a free market system as well. Um, so it's again a nuanced picture. Um, but I think the important things we we we've gone over before is is what what is that money used for, um, and will it produce a ter a return, and that will govern whether debt is sustainable or not.
Alex, you mentioned China's Belt and Road Initiative. There are many countries, particularly in Central Asia, that borrowed heavily, uh, from China, that find themselves heavily indebted to Beijing. Are these entirely above board in your eyes? Uh, because in many ways, um, being indebted to a nation also means that you are politically forced to be aligned with that nation, as well.
I I would stop short of calling it a big conspiracy and and debt trap diplomacy. I think this is this is is loans that have have gone bad and and suffered from poor governance in in the lenders and poor controls, sorry, from the lenders and poor governance by the borrowers. For example,
Let's bring in an. But it has allowed China, for example, Alex, to, um, to say, right, if if you can't repay your debt, then please, we'll have your port, uh, in exchange, or as compensation for that, and that has enabled China to acquire very important, geopolitically important strategic assets, which she's demanded as compensation for lack of payment.
Well, let's put this also to to Daniel as well. China has a huge foothold in multiple African countries. It's invested heavily. It has lent vast sums of money to emerging economies across the continent of Africa. What does that mean for nation's abilities to to stand on their own two feet, to shape their own geopolitical, uh, policies and their own national interests and put those first above those of a very large country with a very, very large sums of money?
Yeah, thank you very much. If you understand the Chinese in terms of their global approach, their philosophy towards Africa, uh, is to support Africa, but predominantly their focus is on our natural resources. Okay? Uh, so they have the money. Africa needs the resources. Just like Al said, in terms of flexibility getting their loans as compared to that of the capital market is quite okay. But their approach is that let's give them the money, let's collateralize the money, use their natural resources as collateral. So China is interested in sovereign guarantee. They don't deal with private sector, they deal with government, use the state resources as collateral for that loan. So when you are unable to pay, they have access to your resources, and this is exactly what the Chinese are doing. As much as I appreciate their presence on the continent, they have a a philosophy to dominate, to dominate Africa, so to speak, and also have access to the Africa's large natural resources to drive their industrialization agenda. And this is exactly what's happening. Unfortunately, the economies on the continent of Africa do not understand this, the global system, and how China is operating in terms of their philosophy towards Africa. And if you don't understand what your competitor is doing, you are likely to be exploited indirectly. So this is exactly what is happening on the continent in terms of our relationship with China.
Okay, Alex, turning to you, is there a greater responsibility, or at least should there be a greater responsibility from rich nations who've benefited from cheap borrowing for decades to do more to ease the debt burden of poorer countries?
Well, there should, but, um, unfortunately, we're moving to a a world that is becoming a bit more multipolar, a bit more fragmented, and, and, and less of a rules-based order. So the kind of behaviors where where countries, um, are lending with not just in mind getting investment return, but with strategic goals as well, is only going to continue. Um, so it's really incumbent on the the countries themselves to to to look inward and their moral compass and see whether, uh, find that balance there. But unfortunately, I think it's going to be a big power competition in the world over the coming years. Uh, and, and that kind of, um, topic is is going to be lower down the priority list.
Um, there are awful lot of global factors beyond everyone's control. Disease, climate change, demographic change. In the last few moments that we have in this conversation, an, I want to ask you about, um, the fact that in Europe, the population is aging fast, rising pensions, healthcare bills are soaring. I mean, can European countries grow enough to pay for all of this? I mean, also countries are being asked, particularly in Europe, to spend more on things like, uh, defense, on climate, on infrastructure. All of that is hugely expensive, isn't it?
It absolutely is. Um, but it's entirely affordable because our monetary systems have been designed to enable. They've been evolved over centuries to enable us to do what we can do. We're limited only by what we can do, not by the availability of money. And, and that's that's our problem really, is that we have a, a misunderstanding of the nature of money, and we've also privatized so much of money that actually, and I just wanted to come back to to Daniel's point about, you know, the levels of corruption in Africa. The fact of the matter is that the whole system is corrupt, essentially, and it's breaking down under that corruption. Um, and, and therefore, I think what is really important now is for African governments to understand that the UN has set up something called a club of borrowers, and it, and just as the the lenders are, if you like, organized in a cartel, which is more or less managed by the IMF, so the, so the, uh, borrowers should now form a club and jointly and actively come together to put pressure on the rich countries because, as has been said by Alex, um, the fact is the rich countries are falling apart, their rules-based order is, is, is falling apart, and there's fraction and there's friction within the global economy.
Okay. So that's going to be difficult to have. Is, is it possible to say yes or no? Are we heading for global financial crisis, given that everything that we've discussed in this, uh, show so far?
Yes, we are. And the fact of the matter is that the system is profoundly unbalanced. It is, you know, it's profoundly, uh, unstable. Um, and it's the miracle is that it's that we haven't had a financial crisis already. You know, global debt is, and private debt is a much bigger problem than public debt. Right.
But global debt is something like 253% of GDP.
When you all of that, as we reach the end of the show, Daniel, I'd like to give the last words to you because climate disasters, all sorts of political instability across the continent of Africa is pushing vulnerable countries deeper into debt. We know that. Should debt repayments be paused? Should they be cancelled? Is there a way of just saying enough is enough, Daniel?
Yes, you are right. Climate change is affecting the continent in terms of food supply, sustainability, and then other issues. Political instability affecting the continent. Uh, so my view is that yes, uh, we need a flexible system in terms of repayment. We need a better deal, uh, by these multilateral institutions and these private institutions that we borrow from, that there should be a transparent approach and more flexible approach in terms of how they deal with African economies so that we will not overly be hit by the, uh, global financial crisis and then the effect of climate change on the continent.
Well, it's been an absolute pleasure, uh, speaking to all three of you. Um, obviously, it's a huge topic to continue unpicking. And Pedaphor, Daniel Amate Anim, and Alex Holmes. Many thanks for joining us on Counting the Cost.
Thank you.
Thank you.
It's a pleasure.
And that is our show for this week. Do get in touch with us on X. I'm Neve Barker, and use the hash AJCTC when you do, or drop us an email. Counting the cost at aljazer.net is our address. But there's more for you online at aljazerero.com/ctc. That'll take you straight to our page, which has individual reports, links, and entire episodes for you to catch up on. That's it for this edition of Counting the Cost. I'm Neve Barker. From the whole team, thanks for joining us. The news is next on Aljazer.