IMF praises India for using 'right policies' to lower high debt; says control over debt major challenge for China

Washington: India has “quite a high” debt to GDP ratio, but New Delhi is trying to lower it using “the right policies”, the International Monetary Fund has said. India’s general government debt remained relatively high, at 70 percent of the GDP in 2017, Abdel Senhadji, Deputy Director, IMF Fiscal Affairs Department, told reporters at a news conference here. “The debt level is relatively high (in India), but the authorities are planning to bring it down over the medium term with the right policies,” Senhadji said. In fiscal year 2017-18, India is planning to continue with the consolidation in the current fiscal year and over the medium term, the top IMF official said. “They are, in fact, targeting their federal deficit of three percent over the medium term, and they are targeting also a debt ratio of 40 per cent over the medium term at the federal level, which corresponds to about 60 per cent at the general government level. And we believe that those targets are appropriate,” the IMF official said. Debt, major challenge for Beijing The overall level of debt is a major challenge for China and to lower it, Beijing must rethink the sources of revenues for its local bodies which is responsible for 85 percent of government spending, the IMF has said. “In terms of public finances, the official numbers for the debt and deficit are modest. The issue is that China does carry out quite a substantial share of its public expenditures at subnational levels,” Vitor Gaspar, Director, IMF Fiscal Affairs Department told reporters at a news conference here. “The main concern has to do with the level and pace of accumulation of overall debt, private and public. So, the control over the debt level – in particular, the rhythm of debt accumulation – is a major challenge for the Chinese economy,” he said. There is a projected accumulation of debt which is sizable in the period 2018 to 2023, the top IMF official said. China thus has to tackle two challenges: the overall rebalancing of its economy, and the issue of vertical imbalance in the public finances, Gaspar said. [caption id=“attachment_4133561” align=“alignleft” width=“380”]  The logo of the International Monetary Fund (IMF) at the organisation’s headquarters in Washington. AFP[/caption] “In order for China to be able to organise itself efficiently in the provision of public services and ensure fiscal discipline at all levels of government, it is necessary to rethink the sources of revenues for sub-national governments,” he said. “That reform process is ongoing, and it is an issue which is recognized and is being tackled by the Chinese authorities,” he added. Avoid policies that increase economic fluctuations With public debt currently at historic highs in advanced and emerging market economies, the IMF has advised countries to avoid policies that increase economic fluctuations. Gaspar has also advised countries to build strong public finances in good times in order to tackle looming risks. The global debt reached a record high in 2016 at US $164 trillion, or almost 225 percent of GDP, Gaspar said, noting that most of the debt is in advanced economies although in the last 10 years, emerging market economies have been responsible for most of the increase. China alone has contributed 43 percent to the increase since 2007. “Public debt is currently at historic highs in advanced and emerging market economies. Average debt-to-GDP ratios, at more than 105 percent of GDP in advanced economies, are at levels not seen since World War II,” Gasper told reporters at a news conference here yesterday. “Countries are advised to avoid procyclical fiscal policies that exacerbate economic fluctuations and ratchet up public debt,” he said. Responding to a question, Gasper said a very high level of debt – in particular, if associated with rapidly increasing debt – have been shown to bring risks to financial stability and risks to broad economic activity. “That is one of the reasons why we emphasised that now in these good times, in this cyclical upswing, it is timely for countries to rebuild fiscal buffers, to build solid foundations of public finance, so that they are prepared for harder times that eventually will come,” he said. In emerging market economies, debt at almost 50 percent of GDP on average is at levels that in the past have been associated with fiscal crisis. In contrast, for low-income developing countries, average debt-to-GDP ratios at 44 per cent of GDP are well below historical peaks. “..but it is important to recall that these peaks involve debt levels that countries were unable to service and were eventually tackled through debt relief initiatives by the international community,” said Gasper. According to Gasper, since the completion of Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI), debt levels have been picking up on average. The increase has been about 13 percent of the GDP in the last five years. “Our debt sustainability analysis indicates that 40 per cent of low-income countries are currently at high risk of or are already in debt distress. This ratio doubled in five years,” he said. Furthermore, debt service has also been rising rapidly, particularly in countries with high inflation rates. The interest burden has also doubled in the past 10 years to 20 per cent of taxes. Public debt-to-GDP ratios will fall in the majority of countries, the IMF predicts, although it singled out the US as a major exception. For the period 2018 to 2023, debt ratios will be declining in three-fifths of low-income developing countries and in about two-thirds of emerging market economies, the top IMF official said. As for advanced economies, debt ratios will be declining in almost all countries, except the US, Gasper said. “In the US, the revised tax code and the two-year budget agreement provide additional fiscal stimulus to the economy. These measures will give rise to overall deficit above US $1 trillion over the next three years, and that corresponds to more than five per cent of the US GDP,” he said. “Debt is projected to increase from 108 percent in 2017 to 117 percent of GDP in 2023. If tax cuts with sunset provisions are not allowed to lapse, public debt would climb even higher,” he added.