It has taken far too long, but it seems that the International Monetary Fund has finally internalised some hard truths about sovereign-debt reduction. Chief among them is that growing economies have an easier time repaying. As such, fiscal consolidation -- the organisation's favoured strategy -- undermines efforts to reduce debt-to-GDP ratios because it inhibits economic growth.
To be sure, this is hardly a new insight. Still, better late than never. The IMF's latest World Economic Outlook presents the results of its own investigation into various debt-reduction programmes undertaken by 33 emerging-market economies and 21 developed economies between 1980 and 2019. "On average," the authors note, "consolidations do not lead to a statistically significant effect on the debt ratio". Instead, they find that higher GDP growth -- "as captured by positive demand and supply shocks together" -- is "an important force" responsible for roughly one-third of the observed debt reduction during that period. The analysis even recognises that fiscal expansion improved debt ratios in several cases.
