Debt explosions and reductions in emerging and developing countries: drivers and implications

This chapter starts by comparing the evolution of public debt in emerging and developing (EMDEs) and advanced economies. It then focuses on EMDEs and provides a detailed analysis of the drivers of increases and the decreases in public debt. Most debt reduction episodes are driven by inflation and associated negative real interest rates and a smaller share are driven by real GDP growth and primary surpluses. Debt explosions are instead driven by the stock flow reconciliation, which in turn is often associated with currency depreciation and foreign currency debt. Large primary deficits are also an important driver of debt explosions while high interest rates are less important. The pattern of asymmetric drivers of debt explosions and debt reduction episodes indicates that a continued focus on improving fiscal institutions to promote true fiscal counter-cyclicality remains relevant and that that better monitoring of currency mismatches and the determinants of below-the-line items is required.