Public debt ratios have increased significantly in 2020 from already elevated levels. Current projections envisage a quick stabilisation and subsequen

The reliability of public debt forecasts

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2021-05-30 21:00:06

Public debt ratios have increased significantly in 2020 from already elevated levels. Current projections envisage a quick stabilisation and subsequent decline in debt ratios. This column assesses the likelihood of this projection by looking at past evidence on forecast accuracy, based on a new comprehensive dataset of medium-term debt forecasts. It finds that forecasts have systematically understated the actual evolution of debt. If the past is a guide to the future, rather than declining, debt ratios could be some 7% of GDP higher five years from now than they are today in emerging and developing countries.

The Covid-19 pandemic led to a steep increase in sovereign debt ratios in 2020, as governments around the world implemented unprecedented fiscal stimulus packages amidst the greatest drop in economic activity since the Great Depression (Baldwin and Weder di Mauro 2020, Baker et al. 2020). Current projections point to debt ratios stabilising quickly and then declining in the medium term (Figure 1). Alongside record-low borrowing costs, this is providing some reassurance regarding debt sustainability and servicing capacity, suggesting that debt vulnerabilities will remain contained.1 

Notes: The chart shows the simple average across countries for historical and projected debt-to-GDP ratio for advanced economies and emerging and developing economies as reported in the October 2020 IMF forecasts. The solid line shows historical data while the dashed lines show projections.

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