DISTRESSING SOVEREIGN DEBT

 Sovereign debt refers to the borrowings of the Governments which is also called as the public debt. Usually Governments resort to borrowings when their revenues or receipts(public revenues)are in short of their expenditures ( Public Expenditure). After the second world war countries witnessed mounting public debt in recent years. The reasons for mounting debt of countries  were  attributed to - 1. Covid19 pandemic which resulted in both revenue loss to the Government and increased public borrowings. Countries were even forced to borrow not only internally but externally also to meet expenditures on urgent health infrastructure and stimulus packages to vulnerable sections. Problems were further aggravated by sharp decline in economic activities and shrinking trade and investment flows.2.High interest rates.Invariably all countries including many developing and less developed countries have had to borrow at high interest rates on account of their weak credit worthiness which in turn increased the debt servicing costs. 3.Capital flight- On account of global uncertainty and market volatility capital flight from developing countries accelerated leading to dwindling of foreign exchange reserves. 4. Corruption and Weak Governance. Weak governance and large scale Corruption have led to poor economic policy making and wasteful spending aggravating debt issues. 5.Climate change. Countries have been impacted by the consequences of climate change like natural disasters and global warming which has also reduced agricultural yields and water table.6. China's Belt and road initiative. China's extensive Belt and Road Initiative in many countries has led to increased borrowing for infrastructure projects in developing countries which in turn raised concerns about the sustainability of the projects on sovereign debt. Infact countries like Srilanka has been pushed to a debt crisis partly due to non yielding infrastructure projects built under Belt and Road Initiative. 7.Geo political Conflicts. Ongoing trade conflicts between USA, European union and China and Russia and Ukraine war have led to supply chain disruptions, volatility in commodity,food and energy prices and increased military spending and socio  economic disruptions 

As per IMF's Fiscal Monitor data world fiscal deficit which was 2.9% of global GDP in 2018 rapidly increased to 9.6 due to Covid19 in 2020, declined to 6.6 in 2021 and 4.7 in 2022. Projected deficit for 2023 is 5,2024 4.6 and 2028 is 4.2.For advanced economies corresponding figures of fiscal deficit were 2.4 in 2018,10.2 in 2020,7.5 in 2021 and 4.3 in 2022. Projected deficit for 2023 were 4.4,  4.2 in 2024 and 3.9 in 2028. In Euro area fiscal deficit recorded was 0.4 in 2018,7.1 in 2020 which declined to 5.4 in 2021,and 3.8 in 2022.Projections for Euro area showed deficit of 3.7  in 2023 2.8 in 2024 and 1.9 in 2028.USA showed fiscal deficit of 5.3 in 2018, which rose to 14 in 2020 remained high at 11,6 in 2021,and  declined to 5.3 in 2022. Projections showed 6.3 deficit in 2023 followed by 6.8 in 2024 and same 6.8 in 2028..Japan's deficit was 2.5 in 2018,9.1 in 2020,6.2 in 2021,and 7.8 in 2022.Fiscal deficit Projections for Japan 6.4 in 2023,4.0 in 2024 and 3.7 in 2028.UK which recorded fiscal deficit of only 2,2 for both 2018 and 2019 continously witnessed unprecedented 13 in 2020 followed by 8.3 in 2021 and 6.3 in 2022.Forecasted deficit were 5.8 in 2023,4.4 in 2024 and 3.7in 2028. China's fiscal deficit stood at 4.3 in 2018 which increased to 9.7 in 2020 declined to 6.0 in 2021 further rose to 7.5 in 2022.Forecast for 2023 is 6.9, 6.4 for 2024 and 6.0 deficit for 2028.India reported 6.4 deficit in 2018,12.9 in Covid19 year 2020,9.6 both in 2021 and 2022.Projections made for 2023 is 8.9,2024   8.3 and 7.6 for 2028.

Global sovereign debt which was estimated to be 82.8% of global GDP increased to 99.7 in 2020,95.5 in 2021 and 92.1 in 2022.Forecast showed 93.3 in 2023,94,6 in 2024 and 98.4 in 2028 ,obviously indicating that the aftermath of  Covid19,  Ukraine conflict,food and energy crisis etc  continues to increase  government borrowings. Advanced economies have borrowed more than their annual GDP from 102.9% in 2018,122.9 in 2020 117.4 in 2021,and 112.4 in 2022.Projected debt percentage is 112.4 for 2023,113.6 for 2024  and 117.8 in 2028,.US debt stood at 107.4 % of GDP in 2018 increased to unprecedented 133.6% in 2020,126.4 In 2021,121.7 in 2022,Projected growth showed   122.2 in 2023,115.8 in2024 and 136.8 in 2028.In Euro area government debt stood at 85.6 % of GDP  in 2018, which increased to 96.6 in 2020,94.9 in 2021 and 90.9 in 2022.Forecasts indicated 89.8 in 2023,89.0 in2024 and 85.4 in 2028.U K showed 85.2% government debt in 2018 which increased to 105.6in 2020,108.1 in 2021and 102.6 in 2022.Projections  showed 106.3 in 2023,169.7 in 2024 and 113.1 in 2028.Japan reported very high sovereign debt of 232.4 in 2018,258.7in 2020,255.4 in 2021and 261.3 in 2022 and the forecasts were 252.2 in  2023,256.3 in 2024 and 264 in 2028.China's  public debt which was only 56.7 % of GDP in 2018 increased to70.1 in 2020 and remained high at 71.8 in 2021 and 77.1 respectively..Sovereign debt projections indicated 82.4 for 2023,87.2 for 2024 and104.8 for 2028.India had 70.4% of sovereign debt in 2018,88.5 in 2020 84.7 in 2021 and 85.1 in 2022. Debt projections 75.3 in 2023,76.8" in 2024 and 80.2  in 2028.

After the onslaught of Covid19 and other global headwinds sovereign debt of many countries shot up substantially. Both inflation and public debt forced 75% of Countries to tighten both monetary and fiscal policies. Even though  policy tightening will have its own impact Government's have to manage mounting debt against the background of low or moderate growth. While 12 less developed countries are in severe debt distress 125 countries countries face high risk due to external debt distress. IMF'S prescription of appropriately designed fiscal consolidation and growth friendly structural reforms can lead to reduction in debt ratios ,they may not be sufficient for the countries in severe debt distress or those facing increased risks,  where debt renegotiation or debt restructuring  is most  appropriate. Restructuring is a method of last resort involving complex process that requires agreement of both domestic and foreign creditors and involves burden sharing among different parties like residents and financial institutions.Combined fiscal consolidation can significantly reduce debt ratios - on an average upto 8 percentage points or more after 5 years both in emerging market and low income countries. Tourism dependent economies like Egypt, Srilanka and other countries like Ghana, Lebanon, Malawi,Pakistan ,Tunisia ,Afghanistan, Eritrea, Mauritian,Somalia, Sudan  Tajikistan and Yemen were hammered by the punch of Covid19 and soaring food and energy prices and struggling to pay rising debts.

In the broader context of policy making Governments should seek to ensure that both the level and rate of growth of public debt is fundamentally sustainable. Sovereign debt managers share fiscal and monetary policy advisors concern about public indebtedness.  Commenting on the policy choices Giancarlo Corsetti observed "The monetary and fiscal authorities may benefit from acting together in ways that are particularly improper in normal circumstances. The budget creates unsustainable debt and the  central bank de facto monetises the debt, For this mix to work however the suspension of good behavior rules must be temporary and limited to exceptional circumstances. "As far as India is concerned present level of sovereign debt is sustainable in the context of forecasted high growth rate.Already RBI has contested case for a higher growth rate for the country against IMF projection. Moreover India emerged as a creditor now,because country is a part of the team along with China  providing solutions to the debt distress of both Srilanka and Surinam outside the Paris club.