The global debt problem is getting even bigger

The consensus view at this week's spring meetings of the International Monetary Fund and World Bank was that the world will be coming out of the pandemic with a debt problem.

Listen to all the chatter and dive into the stack of reports generated on the subject and you'll arrive to a related conclusion: the world's technocrats are caught in an intellectual debt trap. They're not being bold enough in their response, which means the global economy will have that debt problem for some time—even as new bills come due for climate change adaptation and other looming crises.

That's certainly what the IMF expects. In its biannual Fiscal Monitor, it predicted a return by 2028 to near 100% in the global debt-to-GDP ratio, the historic high of the early pandemic. This thanks largely to the US and China.

There's plenty to be concerned about in the political standoff over the US debt ceiling and China's perennial domestic debt problems. But it's concern for the debt woes of impoverished nations where the lack of boldness or even urgency feels most perplexing.

This week in Washington, incremental progress on what path the world should take to help restructure the debt of low-income countries qualified as a victory. What it actually amounted to was little more than an agreement between China, the IMF and the World Bank to keep discussions alive on other sticking points—but little in the way of substantive help.

IMF sees government debt rising to 2020 record by 2028

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Such inaction has consequences. Zambia Treasury Minister Felix Nkulukusa made this dramatically clear when he pointed out that, if his country doesn't get help soon, it would be forced to start laying off teachers and health workers.

The problem isn't just that promised money isn't flowing to poor countries that need it. It's also that the world's cruel realities are overwhelming the little help they've received.

Buried in the second chapter of this week's IMF Fiscal Monitor was the chart below, which points to the price poor countries are paying for the inflation fight being waged by central banks in the developed world.

Strong dollar is punishing developing nations

Share of economic output (GDP)

It turns out that the stronger dollar, fuelled by the US Federal Reserve's rapid hike in interest rates, has measurably increased the debt burden in countries like Senegal, Guinea-Bissau, Mali and Chad. The negative effect has overwhelmed the positive impact of pandemic debt payment suspensions in 2020—sold as bold at the time, but that now seem less so.

There are growing calls for something more consequential to be done. Alongside the activists beating the drum for debt jubilees, serious economists are warning about a "lost decade" in the development of poor economies.

In a report this week, economists at Gavekal Research likened what is unfolding to the early days of the Latin American debt crisis of the 1980s. That calamity, they pointed out, came after another wave of Fed rate hikes and took eight years and the issuance of billions of dollars in Brady Bonds to resolve.

The numbers this time are big, but not totally out of sight. In another recent report, researchers at Boston University calculated creditors will need to forgive up to $520 billion of the $812 billion in debt some 61 countries need to have restructured.

That sounds like a lot, but it's less than 1% of global GDP. A bit of bold thinking and the world can surely afford that.