High debt could slow countries’ recoveries: IMF

Debt accumulated by businesses and individuals worldwide could slow economic recoveries from the pandemic crisis, the IMF warned Monday.

Governments took exceptional measures to support their economies as Covid-19 spread two years ago, including rolling out debt repayment suspensions or offering large-scale loans.

But these programs resulted in higher debt levels for some sectors, including those most disrupted by the virus, like tourism and restaurants, as well as low income households, the Washington-based crisis lender said.

In a chapter of its World Economic Outlook, the IMF said the debt burden could hold growth back in developed countries by 0.9 percent and in emerging markets by 1.3 percent over the next three years.

“Financially constrained households and vulnerable firms, which have grown in number and proportion during the COVID-19 pandemic, are expected to cut spending by more, especially in countries where the insolvency framework is inefficient and fiscal space limited,” the lender said.

To avoid exacerbating problems, the government should “calibrate the pace” of phasing out aid and spending programs.

“Where the recovery is well underway and balance sheets are in good shape, fiscal support can be reduced faster, facilitating the work of central banks,” the IMF said.

For struggling sectors, governments could offer aid to prevent bankruptcies, or provide incentives for restructuring, rather than liquidation.

“To lessen the burden on public finances, temporary higher taxes on excess profits could be envisaged. This would help claw back some of the transfers to firms that did not need them,” the lender said.