Too much debt can hurt World Economies

Business News of Tuesday, 10 October 2017

Source: ghananewsagency.org

2017-10-10

Too much debt can hurt economies

Many governments are getting by on borrowed money allowing them to cover shortfalls without having to increase taxes or cut back public spending.

It is however, very important to note that too much debt can hurt economies, especially in a recession.

The US just passed $20 trillion in debt for the first time, while the UK owes £1.9 trillion ($2.5 trillion) and counting.

The US and UK are not the most indebted countries though. Japan’s debt reached 221.8 per cent of GDP in 2015, according to the Organisation for Economic Co-operation Developments (OECD) Government at a Glance report, which is available to the Ghana News Agency.

It said one way to think about government debt is in per capita terms. So, for example, if the Japanese wanted to pay off their national debt, they would owe $90,345 each.

Among OECD countries, Ireland, the US and Italy are next, with $62,687, $61,539, and $58,693 respectively.

Belgium, at $58,134, is above the OECD average of $50,245.

Austria, France and Greece all have higher per capita debts than the UK, and their citizens would have to find almost $50,000 each ($49,975, $49,652 and $47,869 respectively).

Per capita debt among OECD countries has increased at an average annual rate of 5.9 per cent since 2007. The amount owed per person in each country varies dramatically, from Japan’s $90,345 to Estonia’s $3,761.

The level of gross government debt as a percentage of its GDP is an indicator of how able a country is to pay back debts without incurring further debt.

When a government borrows money, it has to pay it back with interest. So when interest rates go up or the economy slows down, debt levels can become unsustainable.

In 2015, the average level of gross public debt in the OECD countries reached 112 per cent of GDP. That’s compared to 73 per cent in 2007, before the financial crisis.

Debt levels increased the most in Spain, Slovenia, Portugal, and Greece.

Only three OECD countries have reduced their debt levels since the financial crisis: Norway, Switzerland and Israel. Countries with the highest public debt throughout this period are Japan, at 221.8 per cent of GDP in 2015, followed by Greece (181.6 per cent), Italy (157.5 per cent) and Portugal (149.2 per cent).

Although Greece’s debt/GDP ratio is significantly lower than Japan’s, the consequences have been much more severe in Greece, not least because the debt is owed to foreign rather than domestic creditors.

Ghana situation

The total public debt for Ghana as at May this year has reached ¢137 billion putting the debt-to-GDP ratio at 67.5 per cent, a summary of economic and financial data released by the Bank of Ghana has revealed.

This was at the end of the Central Bank’s Monetary Policy Committee meeting to review the health of economy over the past three months.

Breakdown of debt numbers

The report showed that the debt stock increased by ¢9.4 billion in three months from ¢127.8 billion to ¢137.2 billion.

It is not clear for now whether the increase was caused by fresh borrowing by government, the cedis’ depreciation or some commitment that government had to deal with.

However, sources say the increase can be attributed to the recent $2.25 billion bond issued by government in April.

External debt accounted for $17.1 billion, while domestic debt stood at almost ¢63.9 billion. The ¢137 billion debt stock or public debt for May ending was more than the ¢105 billion recorded in the same period for last year.

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