The International Monetary Fund ( IMF ) is asking all countries to take measures to manage their balance of payments while at the same time maintaining economic growth.
Speaking at the opening plenary of the IMF and the World Bank, fund chief Christine Lagarde pointed out that economically advanced countries had average debts around 110 percent of their gross domestic product ( GDP ), the highest level since World War II when major countries struggled to rebuild their war-torn economy.
“One lesson is clear from history — reducing public debt is incredibly difficult without growth. High debt, in turn, makes it harder to get growth,” Lagarde said.
According to the IMF’s fiscal monitoring report “Taking Stock: A Progress Report on Fiscal Adjustment”, the advanced economies’ debts may hit 113 percent of GDP next year, well above projections for the world as a whole of 81.5 percent. The IMF estimates that this year world debt will be 81.3 percent.
Countries with the highest debt to GDP ratio are Japan, with an estimated 236 percent this year, followed by Greece ( 170 percent ) and Italy ( 126 percent ).
The report also estimates that emerging markets’ debts will be the lowest. The emerging markets’ debts to GDP ratio is expected to be 34.8 percent this year, lower than 37 percent last year. The IMF expects that emerging market debts will continue to fall next year to 33.1 percent.
Meanwhile, Indonesia’s debt to GDP ratio is estimated at 23.9 percent this year, lower than last year’s 24.4 percent and will slightly fall to 22.17 percent next year.
Debt reduction could be achieved through monetary policy and fiscal adjustment. Debt needs to be brought down over the medium without undercutting growth. Plans to finish the banking sector clean-up and structural reforms could boost productivity and growth.
“All of this should be complemented by a rebalancing of global demand toward the dynamic emerging markets,” Lagarde said.
On the emerging markets side, she said, developing countries needed to consider more balance growth to reduce inequality.
Also speaking at the opening meeting, World Bank Group president Jim Yong Kin pointed out that the crisis and financial instability in Europe threatened growth and jobs in developing countries.
“Surging food prices are stretching the budgets of the poorest. And many countries in the Middle East are embarking on perhaps their most important transitions in generations,” Kim said.
He warned that countries should not prioritize their own interests but needed to work together to deal with the world’s economic challenges with about 1 billion people living in extreme poverty and 200 million unemployed.
“This goal [of eliminating extreme poverty] is not farfetched — it is achievable. Together we can make it happen,” Kim said.
Meanwhile, eurozone officials are considering new ways to reduce Greece’s huge debt because delays in reforms by Athens and continued recession have put the target of 120 percent debt to GDP ratio in 2020 out of reach.
A Greek debt sustainability analysis prepared by the IMF, the European Central Bank and the European Commission in March forecast Greek debt would rise to 164 percent of GDP in 2013 from around 160 percent in 2012 under a baseline scenario, assuming the Greek economy stopped contracting next year.
But Greece now expects its economy to shrink for the sixth year running in 2013, eyeing a 3.8 percent contraction that would boost its debt ratio to 179.3 percent.
“At the moment, it looks like Greece’s debt level will rise to well above the target of 120 percent of GDP by 2020,” ECB executive board member Joerg Asmussen told the Sueddeutsche Zeitung newspaper.
To bring it back toward the desired level in 2020, Greece could organize voluntary buy-backs of its bonds, he said.
“One has to consider elements that could make it possible to achieve that goal. One possibility would be buying back debt,” Asmussen said.
The money could not come from the ECB, but it could be lent by the European Stability Mechanism, for example, one senior eurozone official, who was in Tokyo for the weekend meetings of the IMF and World Bank, said.
Because Greek bonds trade at very deep discounts, ¤1 of money borrowed from the ESM, the eurozone’s permanent bailout fund, could reduce Greek debt by ¤1.5, offering good leverage, the official said.
Another ECB executive board member, Benoit Coeure, said the central bank would not consider rescheduling the Greek debt portfolio it held — a suggestion repeatedly made by Athens.
A second eurozone official said that while borrowing from the ESM would in itself increase Greek debt, there was another way to reduce it.
— JP/Raras Cahyafitri