TITLE:
Impact of Covid-19 on Global Debt: A Study of Countries in the G-20 Group
AUTHORS:
Dinesh Kumar Srivastava, Tarrung Kapur, Muralikrishna Bharadwaj, Ragini Trehan
KEYWORDS:
Covid-19, Government Debt, Private Debt, Growth, Inflation, 2008 Economic Crisis
JOURNAL NAME:
Modern Economy,
Vol.11 No.12,
December
31,
2020
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.