Current levels of private sector debt, according to the IMF, could slow economic recovery by 0.9 percent of GDP in advanced economies and 1.3 percent in emerging markets over the next three years on average.
Global private debt surged by 13 percent of the world’s gross domestic product in 2020, faster than the rise seen during the global financial crisis and almost as fast as public debt, the IMF said in the report.
Governments succeeded in lessening the economic pain of the pandemic by providing plenty of liquidity, but these policies led to a spike in private debt, extending a steady increase in leverage spurred by supportive financial conditions since the global financial crisis of 2008.
Rising Inflation and Interest rates
As economies recover and inflation accelerates, the IMF said governments should take account of the impact of fiscal and monetary policy tightening on the most financially stretched consumers and businesses when pacing the exit from extraordinary support policies.
IMF calculations show that a surprise tightening of 100 basis points would slow investment by the most leveraged firms by a cumulative 6.5 percentage points over two years—four percentage points more than for the least leveraged.
Where the recovery is well underway and balance sheets are in good shape, fiscal support could be reduced more quickly, facilitating the work of the central bank IMF says, governments should target fiscal support to the most vulnerable in the transition to recovery while remaining within credible medium-term fiscal frameworks.
Policymakers should pay close attention to adverse developments in the financial sector to prevent the rapid tightening of monetary policy from causing large and potentially long-lasting disruptions.
IMF suggests governments should consider cost-effective debt restructuring programmes aimed at transferring resources to relatively vulnerable individuals who are more likely to spend their income when large household debts threaten recovery.
