Impact of Covid-19 on Global Debt: A Study of Countries in the G-20 Group

Abstract

This paper highlights the prospect of a Covid-19 led upsurge in the government debt-GDP ratio of 19 countries in the G-20 group. Many of these countries have Fiscal Responsibility Legislations (FRLs) where government debt-GDP ratios have been targeted. A key policy implication of our findings is that most countries will find that the post-Covid slippage in their government debt-GDP ratio is so large as to call for major changes in their fiscal policy framework. In some cases, even a modification of their FRL may be warranted. The evolution of debt of these countries over the period 1996 to 2019 indicates that major economic crises have led to one-time upsurges in their debt-GDP ratios covering both government and private debt. These ratios tend to remain at high levels well after the crises are over, showing downward rigidity. We estimate that Covid-19 induced increase in government debt-GDP ratio for the selected countries, would amount to 14.9% points on average which is more than 141% higher than the increase of 6.2% points resulting from the 2008 crisis. We propose a methodology to project the government debt-GDP ratio as a function of incremental borrowing relative to GDP, real GDP growth and GDP deflator-based inflation. We also estimate the relative contribution to the increase in government debt-GDP ratio, individually of these factors. We find that the upsurge in the Covid led government debt-GDP ratio is large because of the reversal of the role of the growth factor in explaining the change in the debt-GDP ratio between two successive years. In particular, instead of appearing with a negative sign, which is the case in a normal year, it appears with a positive sign in a crisis year. Further, the fiscal deficit-GDP ratio also increases due to large stimulus packages in a crisis year.