Data from the International Monetary fund (IMF), revealed that global debt reached its highest level in history (US$184 trillion). The world’s debt now exceeds US$86,000 in per capita terms, which is more than two and a half times the average income per-capita. Who has all this debt? Interestingly enough, the most indebted economies in the world are also the richer ones. The top three borrowers in the world are the United States, China, and Japan (they account for more than half of global debt). This isn’t necessarily frowned upon because larger economies,can safely carry a larger debt, since they have the capacity to raise taxes. So there is less chances for holders of its debt to panic.
At the national level, the IMF put total debt in Nigeria at 34% of the nominal GDP of US$376bn as of December 2017, with private debt accounting for 36.6% of the debt. The challenge with rising public debt is it affects economic growth. The IMF had previously recommended that governments should reduce deficits in good times so that they are better prepared for the next financial downturn. Now that it’s clear that debt is rising, should you be worried about it?
Public debt is the total sum of money owed by a country’s government, including its historic debt. Governments typically borrow money by issuing bonds to individuals and financial institutions in exchange for a loan. The government will then pay a fixed rate of interest over a period of time to the investor, paying the bond back in full when it reaches maturity.
Need to Know
| Public debt | Public debt is the total sum of money owed by a country’s government, including its historic debt |
| Internal debt | Money that is borrowed from a government’s own country |
| External debt | Money that is borrowed from abroad |
| Debt crisis | When your country owes more than they can pay off in loans |
| Debt to GDP ratio | The ratio of a country’s public debt to its gross domestic product (GDP). Often expressed as a percentage |
How does public debt affect the citizens of a country? It leads to a lower standard of living, as debt holders demand larger interest rates. Foreign holders repayments are worth less, and imports become more expensive. This is in turn leads to poor economic growth, and weakening of a country’s currency. Governments need to keep a careful eye on their overall level of debt, since high levels of debt mean greater interest repayments. Very elevated levels of debt may even become impossible to repay if tax revenue proves insufficient to keep pace with elevated interest rates (a good example here is what happened to Greece.). Furthermore, a heavily indebted country that investors see as a risky prospect may find it difficult to borrow enough to cover day-to-day spending.
When is a country’s debt too high? The debt-to-GDP ratio is designed to help investors determine if a country has too much debt. A high debt-to-GDP ratio isn’t necessarily bad, as long as the country’s economy is growing. Less government spending, encouraging growth, or increasing tax income are ways of reducing a country’s debt-to-GDP ratio.
What are the common solutions to reducing public debt? Raising taxes and cutting spending are some of the ways a country can reduce public debt. Also central banks can encourage growth by cutting interest rates, which leads to easier commercial lending. Higher growth increases the GDP end of the equation and lowers the overall debt-to-GDP percentage. Government bonds are also used to finance the deficit.
In conclusion, a weak economy poses a huge risk because it can default on its debt. What we are seeing now is Nigeria’s debt to GDP ratio in 2019 is close to the levels we saw back in 2005 (Nigeria and the Paris Club announced a final agreement for debt relief worth US$18 billion and an overall reduction of Nigeria’s debt stock by US$30 billion in October 2005). It’s very important to track Nigeria’s debt (which now stands at US$73.21 billion) because its economy remains weak. Looking forward, let’s see if the government responds with a viable plan to address Nigeria’s high debt-to-GDP ratio after the upcoming elections.
Key takeaways:
- Global public debt is at its highest level in history (US$184 trillion)
- A declining debt- to -GDP ratio indicates if a country has too much debt
- The effect of rising debt on the economy of a country is slower economic growth, lower standard of living, and possibly a weaker currency
- Nigeria’s debt to GDP ratio stands at 34% of GDP; To prevent a default similar to the one encountered in 2005, the government will have to create a plan of action to manage the debt levels
- Raising taxes and cutting spending are some of the ways a country can reduce public debt
