Global Public Debt: Risks, Causes, and Strategies for Mitigatio

Global Public Debt Situation

In recent years, global public debt has skyrocketed, reaching a record estimated at approximately 226% of global GDP in 2023, according to data from the International Monetary Fund (IMF). This has affected not only developing countries but also developed economies, particularly as these debts are mainly issued in the form of foreign debt, increasing exchange rate risks and the ability to service debt.

Causes of Public Debt Growth

The increase in public debt can be attributed to several key factors:

1. High Government Expenditure

Governments worldwide, especially after the COVID-19 pandemic, have had to implement strong economic stimulus measures, including large financial support packages and economic recovery programs. This has put pressure on national budgets and led to a rise in public debt.

2. Low Interest Rates

In a prolonged low-interest-rate environment, many countries have borrowed to fund social welfare programs and infrastructure development without being overly concerned about borrowing costs.

3. Trade and Political Tensions

Trade wars between major economies and political instability in some regions have also led to countries increasing borrowing to maintain stability

Risks to the Global Economy

Public debt, when managed properly, can be a useful tool for countries to raise funds for development projects and infrastructure improvements. However, when public debt rises and is not effectively controlled, it can lead to a series of serious risks, affecting not only the financial stability of the indebted nation but also the global economy. Below are the potential risks when public debt is not managed effectively:

1. Increased Interest Rates and Debt Service Costs

As public debt rises, governments must allocate a significant portion of their budget to pay interest on loans. According to the International Monetary Fund (IMF), global public debt has risen to over $92 trillion, or about 122% of global GDP in 2021. This significant increase in debt burdens governments and leads to a situation where a considerable portion of national budgets is dedicated to paying interest, reducing available funds for other important sectors.

For example, in Italy, a country with one of the highest public debt levels in the Eurozone, interest payments accounted for more than 15% of its national budget in 2021. This has forced the government to make cuts in areas like healthcare, education, and social programs, directly affecting citizens’ quality of life.

Moreover, when public debt reaches uncontrollable levels, countries may be forced to borrow more to pay off old debt. This creates a “vicious circle,” where the more debt increases, the more the government has to borrow, leading to an unsustainable debt burden. A classic example of this is Greece, which in 2010 faced a crisis as its debt-to-GDP ratio reached nearly 150%. To avoid default, Greece had to implement austerity measures under the supervision of the European Central Bank (ECB), IMF, and the European Commission, resulting in painful cuts to public services and increased unemployment.

2. The Risk of Losing Confidence in Public Debt

One of the most severe risks when public debt is uncontrolled is the loss of confidence from investors. According to a 2019 study by the IMF, countries that have high public debt levels, such as Argentina, which defaulted on its debt several times in the last two decades, face a significant risk of losing investor confidence. This results in the country being unable to borrow at reasonable rates, as investors demand higher returns to compensate for the perceived risk.

For example, in Argentina’s 2001 default, the country faced a $95 billion default, which led to the withdrawal of investor funds and significant depreciation of the Argentine peso. As a result, inflation surged, and unemployment rates skyrocketed, causing widespread economic hardship.

This loss of confidence not only affects the country’s ability to raise capital but can also trigger a financial crisis with a cascading effect. A highly indebted large country, such as the United States, for example, risks damaging global financial markets if investor confidence wanes. Even though the US has one of the largest and most liquid financial markets, concerns about rising national debt and fiscal imbalances have led to higher long-term interest rates, as reflected in the growing Treasury bond yields.

3. Negative Impact on the Currency Market

The increase in public debt can also cause imbalances in the global currency market. Countries with high public debt often face a tough decision: increase the money supply to pay off debt or tighten public spending. However, printing more money to pay off debt can lead to rising inflation, causing the national currency to depreciate.

For example, in Venezuela, which has experienced one of the worst cases of hyperinflation in modern history, the government’s decision to print more money to pay off debt led to a staggering 1,000,000% inflation rate in 2018. As the value of the Venezuelan bolívar plummeted, citizens found their savings wiped out, and essential goods became unaffordable. This hyperinflation, partly driven by unsustainable public debt, caused a major economic collapse.

On the other hand, when countries print excessive money to pay off public debt, inflation not only harms domestic purchasing power but can also negatively affect international trade relations. A depreciating currency makes exports cheaper but imports more expensive, as seen in Turkey’s 2018 currency crisis, where the Turkish lira lost nearly 30% of its value against the US dollar due to high levels of public debt and political instability.

4. Dependence on Foreign Capital

One of the consequences of increasing public debt is the growing dependence on foreign capital. In 2021, global foreign debt stood at over $72 trillion, with many developing nations highly dependent on foreign borrowing. Countries such as Sri Lanka, which is heavily reliant on foreign loans to finance public spending, are particularly vulnerable to fluctuations in international lending markets.

The case of Sri Lanka in 2022 illustrates this vulnerability. After reaching a debt-to-GDP ratio of over 100%, the country faced an unprecedented economic crisis, driven partly by its inability to repay foreign loans. In May 2022, Sri Lanka defaulted on its foreign debt, triggering widespread protests and political unrest.

Countries that rely on foreign capital risk not only facing higher borrowing costs but also potential political pressures from foreign creditors. For instance, in Zimbabwe, years of borrowing from international lenders, such as the World Bank, have resulted in external pressure to implement policies that might not align with national interests. This highlights the danger of losing economic sovereignty when countries depend too much on foreign capital.

In particular, countries borrowing from strategic partners can face geopolitical tensions. For example, the growing debt trap diplomacy in Sri Lanka with China and other countries has raised concerns about the potential long-term implications for national security and sovereignty.

In conclusion, while public debt can serve as a tool for economic growth and development, it comes with significant risks when left unchecked. The examples above highlight the challenges faced by many countries, where increasing debt leads to a cycle of financial instability, inflation, and loss of investor confidence. In an interconnected global economy, the consequences of unsustainable public debt extend beyond borders, making it a crucial issue that requires careful management and strategic planning

.Ways to Mitigate Public Debt Risks

Public debt, although an important tool for national development, can become a heavy burden if not properly managed. Without proper control, the risks posed by public debt can affect economic stability and sustainable growth. The question arises: how can these risks be effectively mitigated? KTGA believes that with appropriate strategies, countries can reduce the risks of public debt, creating a solid foundation for future development.

Strengthen Government Expenditure Management

Adjusting the budget and optimizing government spending can reduce reliance on borrowing. When the budget is managed effectively, the government can prioritize important projects and ensure that every expenditure brings long-term benefits.

KTGA recalls a typical example from New Zealand in the 1990s. At that time, New Zealand decided to cut spending on unnecessary programs while focusing on developing healthcare, education, and social welfare. This policy not only helped stabilize public finances but also maintained sustainable social development. This is a clear example showing that a well-managed spending strategy can not only reduce public debt but also maintain long-term prosperity.

Governments can also adopt advanced budgeting techniques, such as performance-based budgeting. This means every dollar spent will be measured by specific economic or social outcomes. KTGA believes this approach not only helps optimize the budget but also encourages effective investment programs, minimizing financial waste.

Reform the Tax System and Enhance Financial Capacity

To reduce public debt, one important measure is to reform the tax system and enhance the country’s financial capacity. A fair and efficient tax system will help increase government revenue without excessive borrowing. Tax reforms not only generate greater revenue but also ensure long-term fiscal stability.

For example, Estonia is a prominent example of successful tax reform. In the early 2000s, Estonia implemented a flat tax system, which not only simplified tax administration but also improved tax collection efficiency. This reform led to a steady increase in government revenue, reducing the country’s reliance on borrowing and allowing for greater investment in public services.

In addition to simplifying taxes, improving the collection process and closing loopholes in the system are essential steps. By addressing tax evasion and ensuring compliance, governments can increase their revenue base without resorting to borrowing. A fair tax system also ensures that citizens and businesses contribute to the nation’s development, improving overall financial stability.

Improve Debt Management and Debt Restructuring

For countries with high public debt, implementing debt restructuring programs or renegotiating loan terms can help alleviate financial burdens. Countries can negotiate with creditors to extend repayment periods or reduce interest rates, which can create more room for economic recovery and development.

KTGA closely followed the debt crisis in Greece, where the country negotiated with the European Central Bank (ECB) and private creditors to restructure its debt in 2012. One of the key outcomes was a 50% reduction in the value of privately held debt and an extension of repayment terms, easing Greece’s financial pressure and allowing for some recovery.

Debt restructuring is not a simple process. It requires consensus and cooperation between multiple stakeholders, from creditors to international financial organizations. However, when executed correctly, it is a crucial tool for addressing public debt issues effectively and sustainably.

Furthermore, managing existing debt by creating sinking funds or using sovereign wealth funds to manage national wealth can reduce future borrowing needs. Norway’s Sovereign Wealth Fund, for example, is built from oil export revenues and is used to invest in foreign assets, reducing the need for public debt and ensuring long-term financial stability.

Encourage Domestic Investment and Reduce Dependence on Foreign Capital

To mitigate the risks of public debt, countries should promote domestic investment, encourage local businesses to grow, and reduce dependence on foreign capital. Creating a favorable environment for businesses to thrive not only strengthens the economy but also enhances financial independence, shielding the economy from external shocks and changes in global financial conditions.

South Korea is a great example, where the government has actively supported small and medium-sized enterprises (SMEs) through tax incentives, low-interest loans, and infrastructure development. By creating a conducive environment for domestic entrepreneurship, South Korea has reduced its reliance on foreign investment and strengthened its financial independence.

KTGA realizes that when a country encourages domestic investment, it not only reduces dependence on external factors but also creates a financial ecosystem that is self-sustaining and resilient. This helps the country avoid risks from fluctuations in international financial markets.

Promote Innovation and Creativity

Innovation and creativity are key drivers of sustainable economic growth. KTGA is particularly impressed with how Israel has built a favorable environment for startups. The country’s policies, including generous research and development (R&D) incentives, tax breaks for high-tech companies, and strong intellectual property protection, have helped Israel become a global leader in technology and innovation.

Innovation not only boosts national productivity but also creates new revenue streams and attracts investment. A creative economy can not only grow robustly but also help reduce dependence on public debt. Countries should invest in future industries such as artificial intelligence, renewable energy, and biotechnology to ensure long-term prosperity and reduce reliance on public borrowing.

By diversifying the economy and moving towards more sustainable industries, countries can reduce their dependency on traditional sectors that may be vulnerable to external market fluctuations, such as oil or agriculture

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