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IMF raises concern over rising debt in emerging economies |
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By Des Ferriols
The Philippine Star 04/20/2005 High debt levels in emerging market economies like the Philippines are fueling concerns that the burden may have reached unsustainable levels unless revenues are increased enough to both reduce borrowing and retire old debt. A paper prepared by the International Monetary Fund (IMF) noted that debt ratios in emerging market economies are a cause for concern after rising sharply in the mid-1990s, currently averaging 70 percent of gross domestic product (GDP). The IMF said in the paper that the rise in public debt in emerging market economies has been concentrated in Latin America and Asia although "over-borrowing" was more prevalent in the former. "At about 70 percent of GDP, the average public debt ratio in emerging market economies now exceeds that in industrial countries," the IMF said. "Not only does this high level of public debt raise the risk of a fiscal crisis in some countries, but it also imposes costs on the economy by keeping borrowing costs high, discouraging public investments and constraining flexibility in fiscal policy," the IMF added. The IMF paper estimated that when examined closely, economies needed to generate enough primary budget surplus in order to sustain huge debt levels. The primary budget surplus (or deficit) of a government is the surplus excluding interest payments on its outstanding debt. The Philippines’ debt-to-GDP ratio as of 2004 was estimated by the Asian Development Bank at 120 percent – twice the level considered prudent by the IMF. On the other hand, the ADB observed a "relatively small" primary surplus which, when combined with the high debt-to-GDP ratio, made the economy vulnerable to external shocks. As a general rule, the IMF paper said that the more stable the revenue, the higher the maximum ratio of sustainable public debt to GDP for any given level of expenditure adjustment that it can commit to reduce. For high risk emerging markets, the IMF said the maximum sustainable debt ratio was between 22 to 30 percent of GDP. In contrast, the maximum sustainable ratio for industrial economies was about 85 percent of GDP. The IMF said its calculations illustrated the link between revenue generation capacity, revenue variability and primary expenditure adjustment and debt sustainability. "Historically, many emerging market economies have not generated large enough primary budget surpluses to ensure the sustainability of their public debt," the IMF said. The inability to generate adequate primary surpluses, according to the IMF, was both a function of weak revenue bases and an inability to control expenditures during economic upswings. According to the IMF paper, governments have a number of potential policy options to reduce their debt: adjust fiscal policy and run primary budget surpluses sufficient to reduce debt; or they can seek to grow or inflate their way out of their debt difficulties; sell assets to retire debt or they can explicitly default. Ultimately, however, the IMF said there was no way around the necessity of reforms to strengthen and broaden the tax base. Governments also have to demonstrate that their overall debt burden is manageable. |
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