Why are emerging market economies such as China, India and Brazil also seeing a growth in debt?

Global debt rose to an all-time high of $307 trillion in the second quarter, by the end of June 2023, the Institute of International Finance (IIF) said in a report released last week. Quite notably, global debt has risen by about $100 trillion over the last decade. Further, global debt as a share of gross domestic product (GDP) has started to increase once again to hit 336% after dropping quite steeply for seven consecutive quarters.

What is global debt?

Global debt refers to the borrowings of governments as well as private businesses and Individuals. Governments borrow to meet various expenditures that they are unable to meet through tax and other revenues. Governments may also borrow to pay interest on the money that they have already borrowed to fund past expenditures. The private sector borrows predominantly to make investments.

Why is it rising?

Both global debt in nominal terms and global debt as a share of GDP have been rising steadily over the decades. The rise came to a halt during the pandemic as economic activity turned sluggish and lending slowed down. But global debt levels, It seems, have started to rise again in the last few quarters.

Most (over 80%) of the rise in global debt in the first half of year year has come from advanced economies such as the U.S., the U.K., Japan, and France. Among emerging market economies, China, India and Brazil have seen the most growth in debt. During the first half of 2023, total global debt rose by $10 trillion. This has happened amid rising interest rates, which was expected to adversely affect demand for loans. But a rise in debt levels over time is to be expected since the total money supply usually steadily rises each year in countries across the globe. In other words, the rise in global debt levels witnessed during the first half of the year is nothing out of the ordinary and does not per se have to mean trouble for the global economy. In fact, even a simple rise in the total amount of savings in an economy can cause a rise in debt levels as these increased savings are channelled into Investments.

What is more interesting than rising debt levels is the drop in global debt as a share of GDP over seven consecutive quarters prior to 2023. The IIF attributes the decline in global debt as a share of CDP to the rise in price inflation, which It claims has helped governments to inflate away the debts denominated in their local currencies. Inflating away of debt refers to the phenomenon wherein the central bank of a country either directly or indirectly uses freshly created currency to effectively pay off outstanding government debt by, for example, purchasing government bonds in the market. But the creation of fresh money causes prices to rise, thus imposing an Indirect tax on the wider economy to pay the government’s debt.

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