Nironjan Roy

Since the beginning of twenty first century, economic recession has been caused by non-economic factors. Usually, recession and boom are economic cycles that come by turn and are caused by strengths and weaknesses of economic fundamentals. When full employment occurs in the economy and scale of production reaches an optimum level, there is no scope for further investment beyond that level.

Consequently, collective demand falls leading to production cut and thus resulting in unemployment, which eventually causes recession. To recover from the recession, some fiscal and monetary measures are taken to increase collective demand, requiring more investment and employment, leading to an economic boom.

Since the great depression in 1930, the world has experienced economic recession and boom in turn after every eight to ten years. During the recession, many businesses were bankrupted and closed. Some people get unemployed and lost their savings. In contrast, an opposite situation arises during the economic boom because some new businesses start, and some people get jobs and make good savings. This is how the economy runs in the world.

Apart from this natural economic cycle, new trend has started, and many non-economic factors are causing economic recession. During 1999 and 2000, the developed world fell into an economic recession caused by the dot-com bubble.

In 2008, the USA fell into recession, the severity of which was so bad that the whole world, particularly Europe, was contaminated with the recession. The main cause of that recession was the failure of highly technology-driven financial derivatives products, commonly known as the subprime mortgage scandal.

After that recession, the economy recovered and was in a boom caused by the non-economic factor, i.e. technology boom. US economy and other developed countries have enjoyed economic benefits from the technological boom.

It was said that between 2009 and 2017, the US economy was run by FAANG (Facebook, Amazon, Apple, Netflix and Google). After 2015, economists anticipated recession to be caused by weakness in the tech business, a non-economic factor, although that recession escaped. During 2021 and 2022, the world was on the verge of a severe recession caused by the COVID-19 pandemic, which was later avoided by massive government spending to support the people.

Now speculation is going on about an economic recession likely to be caused by massive piling up of sovereign debt by many countries, particularly developed countries. Few months back, the IMF (International Monetary Fund) released its biennial report warning that a surge in the sovereign debt of the USA and China threatens to have profound effects on the global economy and the interest rates paid by other countries.

In the report on government borrowing, the IMF mentioned that many rich countries have followed some measures what may result in downsizing their sovereign debt but that is not good enough compared to the size of the debt volume. However, this reduction did not happen to two large economic powers, the USA and China, whose sovereign debt has not reduced at all but rather increased to an alarming level.

Even the historical trend indicates that debt of the USA and China will continue to grow in the next few decades. IMF has forecasted that if currency price remains unchanged, US national debt concerning economic output will rise by 70% by 2053 while Chinese national debt will double by that time.

IMF report further indicated that US sovereign debt to annual GDP (Gross Domestic Product) will rise to 133.9% by 2029 from the current 122.1% in 2023, while at the same time, China’s sovereign debt to GDP ratio will rise to 110.1% from current 83.6%.

It is learnt from the same report that both the USA and China will lead a rise in global government debt to 98.8% of economic output in 2029 from 93.2% in 2023. UK and Italy are other rich countries whose sovereign debt is also enormously rising.

The USA is the country where borrowed money is used to service their national debt. Last May, the USA planned to sell an additional $386 billion bond to raise funds, and the trend is expected to continue in the coming years regardless of whoever wins in the November election. Continuous sales of bonds results in the rise of bond yield, which may have consequences for other borrowers around the world.

IMF report indicated that a rise of one percentage point in US bond yields will result in corresponding rise for developing countries and an increase of 90 bps (basis points) for other developed countries.

If sovereign debt worldwide continues to grow and drastic measures are not taken to restrict the debt, both developed and developing countries will face difficulty. Developed countries will have the highest debt burden and governments will remain in a compelling situation to further borrow to service the debt. As a result, both the cost of borrowing and yield on bonds will remain high.

On the other hand, developing countries will be impacted due to the high debt burden of rich countries. Because the cost of borrowing foreign fund may exorbitantly rise and even, paucity of funds may also turn acute. Many nations will face difficulty in managing foreign fund and development activity may be hindered.

At this critical condition, if some countries happen to default in servicing debt, the worldwide economic condition will further worsen, leading to recession. Especially, the year 2029 is being considered a very critical time when rich countries' sovereign debt will reach at highest level and the whole world will require trillion dollar to service the debt posing the highest degree of default risk. If it happens, the world economy may fall into debt-ridden recession.

As warned by the IMF, many countries, particularly developing nations, must take extreme levels of precautionary measures, including (I) restricting the use of foreign debt with planned reduction thereof; (II) putting control on imports, especially avoiding nonessential imports; (III) extensively increasing export volume through product and market diversification and (IV) mobilising sizable amount of own foreign fund by selling special types of dollar-bond among expatriate Bangladeshis, particularly Bangladeshi workers in the middle east and other countries.

Export diversification must focus on non-traditional items, including fruits, vegetables, bakery items, spices, packaging materials, and jute bags, replacing plastic bags and other products that have steady demands. Similarly, market diversification must focus on exploring new markets, the likes of Latin America, East Europe and some African countries.

According to the IMF report, sovereign debt across the world is going to take an alarming state, which may leave the world economy in recession. So, the countries well prepared in managing foreign funds will be able to overcome the situation if and when arises over the worldwide debt crisis. Our country must also adopt those precautionary measures.
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The writer is a certified anti-money laundering specialist and banker based in Toronto, Canada.
Email: [email protected]