private debt accumulated during the pandemic could slow the recovery

According to an IMF report, this debt could slow GDP growth by 0.9% in developed countries and 1.3% in emerging countries over the next three years.

Debt accumulated by individuals and businesses during the pandemic could slow GDP growth by 0.9% in developed countries and 1.3% in emerging markets over the next three years, according to an IMF report released on Monday.

In order to support the economy, governments took extraordinary measures in early 2020, including granting large loans or suspending debt repayments. But this aid has also increased the indebtedness of certain actors, particularly in the hardest-hit sectors such as tourism and hospitality, or of the lowest-income households. “Financially strapped households and vulnerable businesses, the number and proportion of which have increased during the Covid-19 pandemic, are likely to cut spending further, particularly in countries with ineffective bankruptcy regimes and limited fiscal space», explains the IMF.

In order not to make the problems worse, governments must “calibrate the pace of their fiscal consolidation“, recommends the international organization. “Where the recovery is in full swing and financial accounts are solid, fiscal support can be reduced more quickly, making it easier for central banks to do their jobs“, says the report.

Elsewhere, governments may consider targeted measures. For example, by supporting the sectors where insolvencies are most common, or by providing incentives for restructuring rather than liquidation. “In order to relieve the state finances, excessively high profit tax increases could be consideredtakes note of the report. “This would help recover some of the referrals to companies that didn’t need them.»

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