Numbers & Statistics
How to Use Debt Wisely
How to Use Debt Wisely
By Kristalina Georgieva, IMF Managing Director
20th Annual Research Conference, Washington
November 7, 2019
As Prepared for Delivery
Ladies and Gentlemen—good morning and welcome to the Jacques Polak Annual
It is the 20th anniversary of this conference,
and I would like to thank many current and former colleagues for their
inspiration and tireless work.
Year after year, outstanding academics and policymakers come together to
discuss cutting-edge ideas that can help make a difference—not just
intellectually, but in people’s lives.
Over the next two days, we will talk about the importance of debt. This
theme is more critical than ever, because debt levels have never been
higher. And with low interest rates available to many borrowers, they are
taking on more leverage.
Global debt—both public and private—has reached an all-time high
of $188 trillion. This amounts to about 230 percent of world output.
A major driver of this buildup is the private sector,
which currently makes up almost two-thirds of the total
debt level. But that is only part of the story.
in advanced economies is at levels not seen since the Second World War.
Emerging market public debt is at levels last seen during the 1980s debt
crisis. And low-income countries have seen sharp increases in their debt
burdens over the past five years.
That is why policymakers are facing tough questions:
When are debt levels too high? How can we reduce debt burdens in a fair and
growth-friendly way? And how can we maximize the essential benefits of
I look forward to hearing fresh ideas on how to address these and many
2. The bright side of debt
Let us start by focusing on what I would call “the bright side” of debt. Why do we need loans and other
forms of credit in the first place?
Simply put, they allow us to do something now and pay for it later, when we have more income.
This is a very old idea. Going back to 3,000 BC, loans were provided for
the purchase of seeds, for example. Those seeds would be planted, and the
harvest would repay the debt.
Of course, the lender would need to have confidence in the borrower’s
ability to repay the loan. The word “credit” itself comes from the Latin word for “trust”
—which is the lifeblood of economic and financial systems.
Today, bank loans and credit markets continue to play their essential role
in planting the seeds of future prosperity: helping
families buy a home, helping businesses invest in new ideas, and helping
countries raise extra capital to support growth and employment.
In fact, countries with room in their budgets should use this moment of
low, or negative, interest rates to scale up productive public investments.
In places such as Germany, the Netherlands, and South Korea, an increase in
spending—especially on infrastructure and R&D—can help boost demand and
Where there is fiscal space, borrowing can also help countries scale up
spending to meet the Sustainable Development Goals. This, in turn, requires
building trust through sound macroeconomic policies and a welcoming
The goal is to produce an economic harvest that is good
for the borrower and good for the lender.
2. The darker side of debt
And yet, history tells us about the darker side of debt.
Think of the devastating effects of unsustainable credit booms, including
in the run-up to the global financial crisis.
How can we avoid this reckless risk-taking? Can we tame the private credit
cycle? And what is the role of monetary policy and macroprudential tools?
Jeremy Stein, who will deliver the Mundell Fleming Lecture, will have more to say on that later this evening.
Addressing these issues is more important than ever, because the current
level of record-high debt poses risks to economic and financial stability.
Remember: the buildup of public debt has a lot to do with the
policy response to the 2008 financial crisis—when private debt
moved to public balance sheets, especially in advanced economies.
Recent IMF staff research
shows that direct public support to financial institutions alone amounted
to $1.6 trillion during the 2008 crisis.
In developing countries, the buildup reflects a broader range of
factors—from sharp declines in commodity prices, to natural disasters and
civil conflict, to high investment spending on projects that were not
The bottom line is that high debt burdens have left many governments,
companies, and households vulnerable to a sudden tightening of financial conditions.
Yes, global financial conditions have remained easy, in part because
interest rates are low for longer than expected in advanced economies. But
the world is also facing increased uncertainty—driven by trade tensions,
Brexit, and geopolitical risks.
If investor sentiment were to shift, the more vulnerable borrowers could
face financial tightening and higher interest costs—and it would become
more difficult to repay or roll over debt. This, in turn, could amplify
market corrections and intensify capital outflows from emerging markets.
Of course, high debt is not just a risk to financial stability; it can also become a drag on growth and development efforts.
In low-income countries, high debt burdens could jeopardize development
goals as governments spend more on debt service and less
on infrastructure, health, and education. We estimate that 43 percent of low-income countries are either at high risk
of falling into debt distress or are already in distress.
3. Planting the right policy seeds
So how can countries move closer to the bright side of debt? How can they
plant the right policy seeds?
Let me highlight three priorities that can help make a difference
in developing countries.
First—we need to ensure that borrowing is more sustainable. This means proceeding carefully in taking on new debt—focusing more on
attracting equity-based investment, such as foreign direct investment;
boosting tax revenues; and stepping up the fight against red tape and
It means focusing on investment projects withcredibly high rates of return. And it means increasing the responsibility of lenders—who need to assess the impact of new
loans on the borrower’s debt position before providing new loans.
Debt sustainability is also a key objective of IMF-supported programs.
Recent analysis by the Institute of International Finance
shows that the median Fund-supported program achieved substantial debt
reduction within five years.
Second—we need to ensure that borrowing and lending practices are more
transparent. In many countries, there is room to significantly strengthen the
institutions that record, monitor, and report debt.
Here the IMF is working closely with the World Bank to help our member
countries strengthen their debt management capacity and governance
We are also using our debt sustainability analysis to shine a light on
potential risks, helping borrowers to build—or re-build—trust.
Third—we need to encourage better collaboration between borrower
countries and lenders. This means working together to improve the disclosure of debt contracts,
which can help reduce risks and increase accountability.
We also need better collaboration to prepare for debt restructuring cases
that involve non-traditional lenders, including creditor countries outside
the Paris Club. This means establishing new ways in which official creditor
coordination can take place.
These issues—from debt sustainability, to transparency, to
collaboration—will be critical for the wellbeing of developing countries.
That is why we need increased efforts, more dialogue, and fresh ideas.
The same is true for advanced economies, where governments are wondering about the right policy seeds.
The fact is that some countries with high deficits have seen low interest
rates and low inflation for an extended period. And some are even wondering
whether “low for long” could turn into “low forever.”
It is not surprising, therefore, to see growing debates about the very
nature of fiscal policy in the advanced world.
Is it possible that debt levels that were deemed too high in the past are
now acceptable? Is population aging a game changer for fiscal policy? Is it
time to reassess traditional fiscal rules and assumptions?
I certainly look forward to hearing more on these issues from our
world-class participants, including two former IMF chief economists—Olivier
Blanchard and Ken Rogoff.
They are not only leaders in their field, but they embody the spirit of
intellectual openness and relentless curiosity. That spirit is also at the
heart of our Annual Research Conference.
Over the next two days, we can draw inspiration from the musical Hamilton,
in which Alexander Hamilton ponders a key question. “What is a legacy,” he asks. “ It’s planting seeds in a garden you never get to see.”
I am convinced that the legacy of this generation of economists will be
closely linked to our policy advice on debt.
Our joint responsibility is to help countries plant the right seeds now—so that future generations can share a more plentiful harvest.
Thank you very much.
IMF Global Debt Database (2019, forthcoming), preliminary
Institute of International Finance Economic: Views: High-Debt IMF Programs, October 1, 2019.
IMF Communications Department
Phone: +1 202 623-7100Email: MEDIA@IMF.org