What does the rise in global public debt mean, who will pay the bill for this increase, and are there social or political implications for this development?
Before answering this question, it is important to pause briefly at the data released by the United Nations Conference on Trade and Development on June 4, which indicated that global public debt rose to a record level of $97 trillion last year. Of particular concern in this data is that the share of developing countries in this debt amounts to one-third of this amount, while the value of money owed by governments due to this debt reaches $5.6 trillion. Noteworthy is that global shocks have impacted numerous economies, but the hardest hit were African economies, where the average public debt rose to 62% last year.
Another significant point is that servicing the debt itself, not just the principal, has seen record increases, as many borrowing countries failed to meet their debt obligations, to the extent that the cost of servicing the debt equals or exceeds the principal, consuming large portions of national budgets. It was striking to note that major regional countries like Mexico, Brazil, Egypt, and India have joined the list of countries with substantial public debt.
The question arises: how can we justify this phenomenon that has become a global concern and may explode in many faces in a short period? There are numerous and complex reasons, but the most prominent include the consumption exceeding production and imports exceeding exports, in addition to what is termed "easy debt," meaning that wealthy nations and financial institutions had large financial surpluses and offered loans under very favorable conditions. However, these loans in hard currencies saw successive increases compared to the declining value of local currencies in most indebted countries, leading to an unprecedented jump in the debt amounts.
Subsequently, the global inflation crisis following the COVID-19 pandemic and the repercussions of the Russia-Ukraine crisis exacerbated the situation, with what were easy debts becoming more difficult to manage. However, global inflation, which has turned into recession in many stages, dealt a severe blow to numerous economies, especially in developing countries or emerging economies. This, of course, is compounded by successive crises, slow and uneven performance of the global economy, and the impacts of climate change.
As a result, with the rising cost of borrowing in many parts of the world, the cost of servicing public debt surged to $847 billion last year, an increase of 26% over the previous two years.
What are the initial consequences of the phenomenon of rising global debt? The primary outcome is that it will hinder the ability of countries suffering from this phenomenon to pay for essential government services, especially education, healthcare, transportation, and infrastructure development or renewal. If this inability to repay persists, it will lead to increased unrest and social disturbances, resulting in further instability in various regions of the world.
Solutions to this phenomenon are not straightforward and readily available, as they require different economic, social, and political policies aimed at boosting production and exports while cutting back on consumption, imports, and excess spending. The most concerning aspect is that rising global debt could lead to continued inflation, and if this inflation is coupled with waves of recession, it will signal bad news for most countries, as it will simply mean rising interest rates, leading to higher prices for global goods and significant investment difficulties due to increased borrowing costs. The almost certain outcome is decreased employment and rising unemployment rates globally.
We hope that these dire predictions do not materialize and that economic policies succeed in averting this grim scenario.
