Digital Transformation and the Public Debt Crisis class=

Digital Transformation and the Public Debt Crisis

Observations from the IMF/World Bank Meetings in Marrakesh

The global economic community came together in October for the annual meetings of the International Monetary Fund (IMF) and the World Bank. Set against the historic backdrop of Marrakesh, Morocco, world leaders, policymakers, economists, and financial experts gathered to discuss the state of the world’s economies.

In this article we explore the key themes and takeaways of the discussions in relation to public debt.

The bottom line: digital PFM is part of the solution for debt recovery and government resilience because it can:

  • Enhance well-understood good practices
  • Eliminate inefficient poor practices
  • Provide effective and timely decision information
  • Improve service delivery
  • Achieve more with less
  • Build fiscal space.

The global public debt problem

According to numbers from Keerti Gopal and Lucy Dean Stockton from The Lever:

  • Global public debt was estimated at $92 trillion in 2022
  • Defaults on sovereign debt “at a record high”
  • “3.3 billion people live in countries where debt interest payments are greater than expenditure on health or education”

And, “according to a recent IMF study, the debt of public administrations around the world now stands at 92% of GDP.” While, Colby Smith and Sam Fleming from the Financial Times conclude: “on current trends, government debts would grow “considerably faster” than pre-pandemic projections, with the global public debt ratio on course to approach 100 per cent of gross domestic product by the end of the current decade.”

The big picture: Speakers and panelists at the IMF/World Bank Annual Meetings in Marrakesh diagnosed, discussed, and demanded. Articles, blogs, communiques, presentations, reports, and social media posts proliferated, on topics including:

Here are just a few examples:

Why Is Discussing Public Debt Important?

Public debt constrains pandemic recovery, sustainable growth, and citizen wellbeing investments. And it is citizens who suffer most when a country’s debt becomes a problem. According to a United Nations report, at at least 19 developing nations allocate more money to repaying creditors than to education, and 45 spend more on interest than health expenditure. Other essential government services such as housing, disaster prevention, and climate adaptation also suffer. And it can be a vicious circle: as countries get into more debt, they struggle to pay off initial loans, have to renegotiate, and end up with higher rates and shorter repayment timelines.

Those participating in the IMF/World Bank meetings observed:

Meanwhile , many observers identified causes:

  • austerity demands from the IMF (that the IMF rejects)
  • lack of private investment on one hand, bad private sector lender behaviour, on the others
  • complacency because of low interest rates
  • poor outcomes from borrowing
  • opaque public debt practices
  • incentives to take on more debt
  • lack of political will in high-income countries.

Again, social media in particular was alive with debate:

How can digital help and enhance good Public Financial Management (PFM) practices?

The increasing digitization of Public Financial Management (PFM) combines modest well-understood practices with transformative capabilities. Among modest initiatives are:

  • Treasury Single Accounts (TSAs) to leverage dormant bank funds
  • cash and liquidity forecasting for improved planning and early warning
  • analysis of subsidies, like fossil fuels, that can be reduced or eliminated to provide funds for more important social spending
  • action to improve PFM assessments, like Public Expenditure and Financial Accountability (PEFA), that could support the use of country systems and direct budgetary support to reduce aid transaction costs (but doesn’t seem to, as yet)
  • aggregated commitment controls to improve budget credibility
  • e-filing to facilitate revenue mobilization
  • e-procurement to reduce spend and improve value-for-money (when integrated with back-office procurement)
  • decentralization of many PFM functions so that finance ministries focus more on policy and spending effectiveness
  • debt, grant, and aid information system integration to get a full picture of obligations
  • migration to accrual accounting to show arrears, assets and liabilities to make more effective fiscal decisions
  • fiscal rules integrated with Financial Management Information System (FMIS) controls across the budget cycle, including debt to GDP and debt servicing to social budget ratios
  • leverage blockchain for wage bill, procurement, or tax administration anti-corruption.

Among the more transformative digital initiatives are:

  • debt transparency portals, preferably part of other fiscal transparency initiatives that can help to improve credit ratings and constrain reckless borrowing, enabling debt accountability while reducing corruption
  • debt interoperability across the budget cycle, including budget planning with medium-term approaches and performance structures to optimize the effectiveness of borrowing
  • use of big data analytics for evidence-based decisions, while supporting performance audit
  • interoperability between revenue and expenditure systems to identify tax evasion.

Public debt can be put to good work

Discussions also highlighted an important point: public debt is not inherently damaging. It can be used to drive development and growth.

Key conclusion

Digital PFM cannot solve the debt crisis. However it can be utilized to deliver both modest enhancements and transformative programs, and it can help to fuel coordinated complex debt action.

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