![]() ![]() In addition, decades of capital account and financial liberalizations have reduced governments’ room to use financial repression to lower debt. However, financial repression is a costly way of lowering debt because it discourages more productive uses of savings. Financial repression, such as capital controls and certain financial sector regulatory measures, are means to depress differentials between real interest rates and growth rates by trapping savings in specific instruments. ![]() And if high debt is the result of persistent spending pressures or revenue weakness, a bout of surprise inflation cannot reduce debt in a lasting manner. High inflation also risks undermining the hard-won credibility that EMDE central banks have achieved over the past three decades. For example, inflation is typically accompanied by exchange rate depreciation, raising debt when the share of short-term debt or foreign currency-denominated debt is large. However, inflation has drawbacks as a debt reduction strategy. Unexpected inflation erodes real debt burdens if it raises nominal incomes faster than nominal interest rates rise.However, EMDEs face significant implementation challenges in raising revenues through wealth taxes. Wealth taxes have received renewed interest since the global financial crisis, in part stemming from concerns about an unequal distribution of wealth.While privatization may yield benefits for some EMDEs, including debt reduction, some of the preconditions needed to realize the full potential of privatizations are not yet in place. Proceeds from privatization of public assets have also been used to lower government financing requirements or debt. ![]() However, such consolidation typically comes at the cost of lower growth. The loss of access to financial markets, or the threat of lost access, has sometimes forced countries into severe fiscal consolidation. ![]() Fiscal consolidation can produce primary fiscal surpluses to pay off debt through expenditure cuts or revenue increases.While the COVID-19 pandemic may be similar in some dimensions, the jump in 2020 followed a steady debt buildup during the previous decade because of persistent spending pressures and revenue weaknesses. For example, past episodes of debt reduction through rapid growth typically followed periods in which debt ramped up quickly after one-off shocks such as wars. Looking ahead, however, several factors argue for caution in relying on growth alone to lower debt burdens. Higher growth, in excess of interest rates, helped some countries to reduce their debt stocks (relative to GDP).In the past, debt reduction efforts used orthodox policy options (enhancing growth, fiscal consolidation, privatization, and wealth taxation) and heterodox options (inflation, financial repression, debt default and restructuring). So, how can EMDE policy makers address this record-high debt? History offers some lessons, but no easy solutions. Government, private, domestic, and external debt are all at multi-decade highs across advanced economies and EMDEs. Furthermore, while interest payments in advanced economies have been trending lower in recent years while these have been steadily climbing for EMDEs. In addition, this came on the heels of a decade-long global debt wave that was the largest, fastest, and most broad-based in the past five decades. The pandemic-induced recession of 2020 led to the largest single-year surge in global debt since at least 1970. As The Aftermath of Debt Surges points out, policymakers need to prepare for the possibility of debt distress when financial market conditions turn less benign, particularly in emerging market and developing economies (EMDEs). Economies across the globe face a daunting challenge: the highest global debt levels seen in half a century. ![]()
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