The International Monetary Fund (IMF) has warned the policy makers around the world to anticipate the rising debt. This will certainly make people and the private sector think twice before spending, which could result in stagnant economic growth.
In the Global Financial Stability Report, which is a six-month report that was issued on Wednesday (4/13), the IMF recorded an increase in the debts of many nations compared with last year. This rising debt goes hand in hand with the spiralling fiscal or budget deficits of these countries. Debts are mounting too quickly in a number of major oil-producing countries. Plummeting global oil prices have thrown their state budgets into chaos.
In the Middle East and North Africa, for example, the estimated cumulative increase in the budget deficit is US$ 2 trillion over the next five years. This estimation is compared to the period 2004-2008 when oil prices were at a peak. (Read: BI to Adopt Non-Aggressive Interest Rate Policy)
The IMF also predicted that the 2015-2016 budget deficit of emerging market nations would continue to rise, even higher than their deficits during the 2008 financial crisis. The IMF said that there are three factors contributing to this increase: low global oil prices, lack of investment in these countries, and increased the geopolitical tension.
According to the IMF’s Head of Fiscal Affairs Vitor Gaspar there are three threats to the economic growth of developed nations: the economic slowdown, low inflation, and increased personal debt. If the global economic slowdown continues, public and private debt could increase. As a result, people, corporations, and governments might be tempted to reduce their spending.
It is these conditions that make economic recovery even more difficult, which means that the global economy will remain stagnant for a long time. “This would put further pressure on growth in GDP, creating a spiral [effect] that must be avoided,” Vitor said, as quoted by Bloomberg, Thursday (4/14). (Read: IMF Welcomes Indonesia’s Move to Revise State Budget)
So, the IMF is urging governments to increase spending or cut tax to stimulate consumer demand. These measures to fuel demand and supply are important to trigger faster economic growth. Japan, for example, must provide adequate fiscal stimuli to offset the government’s plan to increase consumption tax. The European Union should relax its deficit regulations to allow for increased spending.
“The results of our review indicate that the level of risk is greater than six months or a year ago. Global growth is on a knife-edge,” Vitor said. As a result, the IMF said, at the “Too Slow for Too Long” press conference, it would be cutting its projections for global economic growth for this year to 3.2 percent from its previous projection of 3.4 percent. Projected growth for next year is 3.5 percent.
In Indonesia, the budget deficit this year is predicted to swell from 2.15 percent to 2.5 percent of GDP. The main reason for this is plummeting global oil prices, which have resulted in a decrease in non-tax state revenue from the natural resources sector of IDR 70 trillion. The same also goes for income tax from the oil and gas sector, which is projected to decline by IDR 17 trillion to IDR 25.1 trillion. This decreased state revenue prompted the government to cut its spending in the revised 2016 state budget by IDR 50.6 trillion.