Saudi Arabia’s Finance Minister, Mohammed Al-Jadaan, has sounded an alarm over mounting national debt levels, particularly in low-income and emerging economies, warning that rising debt poses a critical threat to global financial stability. Speaking at the Future Investment Initiative in Riyadh, Al-Jadaan stressed the urgency of addressing sovereign debt, which has ballooned to record levels worldwide. The risks associated with this debt are exacerbated by “growing global fragmentation,” Al-Jadaan noted, which limits cooperation and weakens the fiscal resilience of lower-income nations.

“The serious issue we need to watch globally is sovereign debt, particularly in low-income countries and emerging economies that lack the fiscal buffers to withstand market disruptions,” Al-Jadaan told CNBC. “Hopefully, between the IMF and the G20, we will find a solution and be ready to support the world economy in case of shocks.”

Global Debt at Record Levels

The rapid accumulation of debt has become a significant point of concern for policymakers and global organizations. According to recent United Nations reports, global public debt reached a staggering $97 trillion in 2023, with emerging markets feeling the brunt. In Africa alone, the number of nations with debt-to-GDP ratios exceeding 60% rose from just six in 2013 to 27 in 2023. High debt ratios limit these nations’ abilities to allocate resources toward essential services such as health care, education, and climate resilience, further weakening their economies.

The UN has called for urgent reforms to help stabilize these economies, especially as the cost of debt servicing rises, consuming resources that would otherwise support long-term development. In many low-income countries, debt payments now outweigh spending on essential sectors, a situation Al-Jadaan described as unsustainable for global stability.

Inflation and Central Bank Policies Add Pressure

Al-Jadaan also touched on inflationary pressures and the critical role of central banks. He pointed out that current efforts to control inflation require carefully coordinated moves to avoid plunging economies into recession. “A lot of discussion [among world leaders] centers around steering a soft landing, which is very important,” he noted, reflecting the cautious optimism shared at recent IMF and World Bank meetings.

However, tackling inflation without exacerbating debt issues is a delicate balancing act. As central banks raise interest rates to curb inflation, the cost of borrowing escalates, adding pressure on emerging markets already grappling with significant debt burdens. Higher borrowing costs limit these countries’ abilities to stimulate their economies and implement reforms, further intensifying the debt crisis.

Sovereign Debt Challenges for Emerging Economies

Emerging economies, many of which rely heavily on external debt, are particularly vulnerable to these dynamics. Rising interest rates increase debt servicing costs, creating financial strain in countries that rely on international lending to meet fiscal needs. When debt servicing overshadows spending on public services, these nations face challenges that hinder their development. This imbalance risks pushing low-income nations into a cycle of debt dependence, reducing their fiscal space for growth-oriented policies.

In response to these issues, Al-Jadaan emphasized the importance of collaboration among global institutions such as the IMF and G20 to seek long-term solutions. He highlighted the need for effective, globally coordinated measures to address these economic fragilities, while acknowledging the complexities involved in assisting nations with limited fiscal resources.

Implications for the Global Market

The impact of rising debt is not confined to individual countries—it has far-reaching implications for the global market. Nations struggling with debt can create instability in global supply chains, reduce demand for exports from larger economies, and even contribute to currency fluctuations. If left unchecked, the debt crisis could lead to a significant retraction in global trade, affecting businesses and consumers worldwide.

Moreover, the debt crisis has prompted a growing concern among investors, as financial markets react to instability in emerging markets. Debt-ridden economies are seen as high-risk investments, which can lead to capital outflows, further devaluing their currencies and triggering inflation. Such a situation could deter investment, reducing economic growth prospects even more.

A Call for Urgent Action

Global organizations are increasingly recognizing the need for debt restructuring and relief programs to provide low-income countries with the fiscal breathing room required to focus on sustainable development. The IMF, G20, and World Bank are expected to play leading roles in these discussions, seeking to establish frameworks for debt reduction and financial resilience.

Al-Jadaan expressed hope for a collaborative approach, stressing that the world cannot afford to overlook the challenges faced by debt-laden nations. “Low-income countries are now spending more on debt service than on health care, education, and climate action combined. This is not sustainable, and we need a solution that benefits the global economy,” he said.

The Path Forward

Addressing the debt crisis requires structural reforms, debt relief, and global cooperation. Policymakers and financial institutions are advocating for initiatives like debt swaps for sustainable development and climate projects. Such swaps would allow nations to reduce their debt burdens while addressing climate challenges, potentially unlocking investment for long-term growth and resilience.

While global organizations work on solutions, the situation highlights the importance of fostering economic resilience and reducing reliance on debt in emerging markets. The path forward is uncertain, but the commitment of international financial leaders to address sovereign debt issues is a critical step in supporting the global economy’s long-term stability.

(Adapted from CNBC.com)