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The World Bank Raises Concerns about Global Debt Levels

The World Bank has published its biannual Global Economic Prospects report. In it, they warn about the dangers of rising debt levels around the world and give some guidance on how to avoid this leading to a worldwide financial crisis.

What Did the Report Say?

The key finding here is that we are currently going through the biggest and fastest increase in global borrowing since the 1970s. To put it into some sort of historical context, the World Bank researchers pointed out that the world has seen four different “waves” of debt accumulation in the last five decades.

They state that the current wave began in 2010 and has seen the “most broad-based increase” to date.  Ayhan Kose is the director of the World Bank’s Prospects Group and he said that these waves where debt levels rise “tend to have unhappy endings”.

There are a number of similarities to be found between the current wave of debt and the previous examples. These include increasing vulnerabilities, worries over whether the funds being borrowed are used efficiently and a shifting financial landscape. The periods of the previous waves are noted as being 1970 to 1989, 1990 to 2001 and 2002 to 2009.

2018 saw global debt levels rise to an all-time high. It was reported as being 230% of gross domestic product (GCDP). If we look just at the economies of emerging and developing nations, we can see a figure of 170% of their GDP. This is 54 points higher than the number seen in 2010.

The growth in debt levels is a general trend across the world. Part of the effect has been a rise in the number of companies finding out about collection agency fees as they look to recover their money. It was noted that China makes up the largest amount of the recent debt build-up. 

What Can Be Done?

The World Bank has encouraged governments and central banks in different countries to be aware of the risk of a new global debt crisis. They fear that even the low interest rates currently being used in many regions might not do enough to avoid another financial meltdown around the planet. 

In this respect, the writers point out that the historically low interest rates “mitigate some of the risks associated with high debt level.” However, they remind us that all three of the previous waves of debt accumulation resulted in financial problems in different parts of the world.

The report states that “policy improvements are critical to minimise the risks associated with the current debt wave.” They give four possible options for nations looking to lower the risk of entering a financial crisis.

These options include sound debt management and transparency to lower borrowing costs. Next, they suggest seeking protection in robust monetary and exchange rate policies.

The third point that they recommend is strong regulation and supervision of the financial sector, as a way of lowering emerging risks. Finally, they recommend ways of making sure that debt is used effectively. These include better public finance management as well as strong corporate governance policies.

The World Bank has predicted economic growth around the planet to reach 2.5% in 2020. This is an increase from their previous suggestion of 2.4%, although they have repeated the concern that downward risks remain.