Government debt - Country rankings

Definition: Debt is the entire stock of direct government fixed-term contractual obligations to others outstanding on a particular date. It includes domestic and foreign liabilities such as currency and money deposits, securities other than shares, and loans. It is the gross amount of government liabilities reduced by the amount of equity and financial derivatives held by the government. Because debt is a stock rather than a flow, it is measured as of a given date, usually the last day of the fiscal year.

Why and how do governments borrow money?

Governments engage in various activities but tax revenue often falls short of the financing needed to fund these activities. That results in a fiscal deficit, a situation where government expenditure exceeds revenue. To finance such a deficit, governments borrow to undertake their fundamental roles. In addition, governments consider borrowing over the printing of money or an increase in tax due to the risk of inflation or reducing household consumption and private investment.

Governments owe public debt either to local or foreign lenders. Most government debts are usually in the form of bills, bonds, notes, etc., which the governments are expected to pay back the domestic holders at an agreed time. Furthermore, governments also accumulate foreign debt by borrowing from foreign banks, foreign governments, or multilateral organizations such as the World Bank and the IMF. The major distinction between domestic and foreign debts is that while the former is owed in the country’s currency, the latter is owed in a foreign currency, usually the U.S. dollar. Maintaining government debt in the domestic currency is preferable but countries often resort to foreign borrowing when the amount needed cannot be provided via local sources.

At what threshold does debt become a problem?

The general prudence prescription is that advanced economics should aim for debt no greater than 60 percent of GDP while emerging markets should not exceed 40 percent of GDP. However, these levels are not set in stone as various studies point to debt of 100 percent or even more for developed countries. Clearly, most advanced economies have government debt to GDP well in excess of 60 percent and these debts are sustainable and do not seem to reduce economic growth. For emerging markets the 40 percent threshold seems more binding as the debt is more likely to be denominated in dollars and the countries have more limited access to global financial markets. If the dollar appreciates or global liquidity declines, these countries could enter into debt problems.

A major consideration is whether the debt service, i.e. the interest paid on debt, is a large fraction of government spending. If it is, then servicing the debt could become a problem in economic downturns when government revenue declines or when interest rates increase.

At the far end of the debt scale are the heavily indebted poor countries (HIPCs) with debt levels as high as 200 percent of GDP or even greater. These are poor nations that cannot service these debts without the sustained help of the multilateral institutions. For more information about the list of countries and the HIPC initiative, you can visit the International Monetary Fund Factsheet page.

Measures to maintain debt sustainability

There are several approaches to promoting debt sustainability. First, maintaining sustained high GDP growth helps to reduce the debt-to-GDP ratio, which significantly lowers the volume of debt relative to GDP. Second, governments can also use low interest payments to reduce the burden of debt repayment. Third, if debt is acquired in a foreign currency, countries can ensure debt sustainability by maintaining a low depreciation in their exchange rate in order to reduce the cost of repaying the debt.

And, overall, debt to GDP does not increase if fiscal deficits to GDP are lower than the rate of GDP growth. Then, while fiscal deficits add to the level of debt, these additions are smaller than the expansion of the economy. The debt to GDP ratio then does not increase. In other words, the surest path to debt sustainability is to keep the debt level low by not running large fiscal deficits.