If you thought excessive indebtedness was a Pakistan-only problem, you were mistaken. Global public debt — both domestic and external — continues to increase rapidly, driven by cascading crises, as well as sluggish and uneven performance of the global economy.

It hit a new ‘milestone’ last year: a staggering $97 trillion, up from $91.4tr in 2022 and $50tr in 2010. And more than a third of that comes from one country: the United States.

The world’s largest economy has accumulated nearly $35tr in debt to finance its growing expenditures and soaring fiscal deficit. The US debt is so large that the International Monetary Fund (IMF) has sounded multiple warnings in recent months that growing US debt is putting the entire global economy at risk.

For perspective, according to a new United Nations Conference on Trade & Development (UNCTAD) report, ‘A world of debt 2024: A growing burden to global prosperity’, the US debt is now more than the combined economic output of China, Germany, Japan, India and Britain. It is also substantially bigger than the combined public debt of $29tr in developing countries.

Pakistan’s general government debt of $260.9 billion, or just 0.3 per cent of the total global debt, is peanuts in comparison. The problem is that Islamabad is unable to service it without taking more loans due to low tax-to-GDP ratio and growing trade deficit due to shrinking exports.

America’s exorbitant debt profile sparks concerns as IMF warns of adverse global impacts, especially on developing nations who struggle with debt servicing

The UNCTAD report highlights that debt in developing countries now accounts for 30pc of the global total, a substantial increase from a 16pc share in 2010, reflecting rapid growth.

The burden of this debt varies significantly with countries’ ability to repay it and is exacerbated by the inequality embedded in the international financial architecture: those least able to afford it end up paying the most.

Meanwhile, repaying debt has become more costly, and this is hitting developing countries disproportionately. In 2023, developing nations paid $847bn in net interest, a 26pc increase from 2021. They borrowed internationally at rates two to four times higher than the US and six to 12 times higher than Germany.

The rapid rise in interest costs is limiting budgets in developing countries. Currently, half of them designate a minimum of 8pc of government revenues to debt servicing, a number that has doubled in the last 10 years.

In April, the IMF said in its benchmark Fiscal Monitor that massive US fiscal deficits (estimated to reach $2tr this year) and consequent debt accumulation have stoked inflation and pose “significant risks” for the global economy.

IMF chief economist Pierre-Olivier Gourinchas said the US’ fiscal position was “of particular concern”, suggesting it raises longer-term fiscal and financial stability risks for the global economy.

IMF’s First Deputy Managing Director Gita Gopinath said while high deficits are supporting growth in the US and globally, there is a downside. “Along with that growth, you’re getting higher interest rates and a stronger dollar and the second two are creating more complications for the world,” she told the IMF at the World Bank Spring Meetings.

While economic indicators and recent turmoil in financial markets may not technically constitute clear signs of a recession, risks in the US economy and its financial markets are said to be building up. These risk factors pose a threat to its own financial stability and that to the world from multiple aspects.

The IMF chided Washington that rising deficits, if continued, would bring the US debt-to-GDP ratio to a concerning level of 140pc by the end of the decade. “Such high deficits and debt create a growing risk to the US and global economy, potentially feeding into higher fiscal financing costs and a growing risk to the smooth rollover of maturing obligations,” the Fund said.

The Fund also said that intensifying US tariffs and other trade barriers, along with the increased use of industrial policy to favour domestic firms, represented a downside risk for the US and global economies, with the potential to distort investment flows and undermine the global trading system. Instead, it called for Washington to work out differences with trading partners through negotiations and strengthen the World Trade Organisation.

The Washington-based agency is also worried that, if US inflation stays high, it could dash investors’ hopes for interest rate cuts, leading to a selloff of financial assets, including stocks and government bonds around the world. A resulting fall in the price of bonds would raise their yields.

“Loose fiscal policy in the United States exerts upward pressure on global interest rates and the dollar,” Vitor Gaspar, director of the IMF’s fiscal affairs department, said. “It pushes up funding costs in the rest of the world, thereby exacerbating existing fragilities and risks.

Globally, borrowers would find it harder to service debt, given higher bond yields,“ he added. According to Mr Gaspar, the problem could be especially acute in low-income countries, where constraints on public finances are “particularly severe”.

At its core, the US takes on new debt to pay off the old, the argument goes, and this is largely due to the dollar’s dominance. Analysts believe the US has leveraged the dollar’s supremacy to shift its risks and extract global wealth through interest rate fluctuations. But the issue of piling up debt will damage the US dollar’s status as the global reserve currency, which is already showing worrying signs.

US Treasury Secretary Janet Yellen testified earlier last month before the House Financial Services Committee that one of her concerns is how best to protect the international status of the US dollar as US financial sanctions have pushed more countries to seek alternative financial transaction methods that do not involve US dollars.

Foreigners have been cutting back on purchases of US debt. Last year, foreigners held 33pc of the US Treasury debt, down from 43pc in 2013, according to a US Bank Asset Management analysis.

That trend means the Treasury will be under pressure to offer higher interest rates to attract buyers for its bonds, which would send bond prices down and could weigh heavily on the stock market.

While the US national debt may seem a distant concern to many Pakistanis, its impact may have significant consequences for its economic stability like the rest of the developing world.

Published in Dawn, The Business and Finance Weekly, August 26th, 2024