Regionally, the evolution of government debt after global recessions was more varied (Figure 8; Table 4). Almost all regions saw an increase in debt following the first two recessions (which coincided with the first wave of debt accumulation) with particularly large increases in EAP, LAC, and SSA. EAP and LAC saw an unwinding of this debt in the period after the 1991 recession as debt was reduced, including due to the provision of debt relief (via the issuance of Brady bonds), while debt in SSA rose further as many countries did not receive debt relief until the late 1990s (Kose et al. 2021). Debt was broadly stable in most regions following the 2009 recession which mainly affected advanced economies. Overall, all regions other than SSA saw at least one global recession episode in which government debt declined.

Near-term prospects. In the medium term, global government debt stocks are expected to stabilize at current levels because of the post-pandemic surge in growth and withdrawal of fiscal support measures.<sup>5</sup> National forecasts for G20 countries suggest a small (2 percentage points of GDP) increase in 2021; for the half of G20 countries with publicly available data, government debt is expected to stabilize in 2022-23. These projections imply that a decade of rapid debt accumulation would end in the next five years. If such a stabilization materialized, it would present a significant departure from developments in the aftermath of previous recessions.

While a stabilization or decline in debt-to-GDP ratios following a global recession is not unprecedented for most regions, it is unprecedented in SSA, where debt has increased following each previous recession. Over the past 40 years, government debt in SSA only declined during the late 1990s and 2000s as a result of the Heavily Indebted Poor Countries (HIPC) initiative and MDRI. The largest declines, historically, occurred in EAP (excluding China) and LAC after the 1991 recession, with government debt in these regions falling by 16 percent and 13 percent, respectively. This period saw a number of countries in those regions issue Brady bonds, which provided an average debt reduction of about one-third of the eligible debt stock (Arslanalp and Henry 2005; Reinhart and Trebesch 2016).

The expected stabilization in debt-to-GDP ratios, together with current low interest rates, may alleviate some concerns about elevated debt levels at present, even if some countries face significant debt challenges. However, forecasts of government debt tend to suffer from optimism bias: actual government debt was about 10 percentage points of GDP higher after five years than initial forecasts (Estefania Flores et al. 2021a, 2021b).<sup>6</sup> In addition, forecast errors during recessions can be larger than for non-recession periods, particularly in advanced economies.<sup>7</sup> Similarly, among euro area countries, studies have shown that national forecasts and those of the European Commission suffer from optimism bias in forecasting fiscal balances, especially when they are close to the 3 percent deficit rule (Frankel and Schreger 2013; Gilbert and de Jong 2017).

In light of this historical record, and given large financing gaps and significant investment needs, debt levels will likely continue to rise in the near future. An upward surprise to government debt ratios of the magnitude reported in earlier studies (10 percentage points of GDP), if it were to occur, could see many more countries facing even deeper debt payment difficulties. Such an

> 5 Forecasts by both the IMF and S&P indicate a slight decline and stabilization in global debt. The IMF projects a gradual decline in advanced economies and a small increase in EMDEs, while forecasts for EMDEs excluding China show a slight decline and stabilization over 2021-25. The S&P forecast is similar and implies a small increase in EMDE debt over the next four years and a small decrease in advanced economy debt. Data are available for 39 advanced economies and 153 EMDEs from the IMF’s October 2021 World Economic Outlook. Data are available for 36 advanced economies and 85 EMDEs from S&P’s Sovereign Risk Indicators, 2021 Estimates.

> 6 The study used government debt forecasts made by the IMF for the period 1995-2020 and the Economist Intelligence Unit (EIU) for the period 2007-2020, covering an unbalanced panel of 174 countries.

> 7 A forecast evaluation exercise by the U.S. Congressional Budget Office also found debt forecast errors were larger following recessions (CBO 2019). The average error of forecasts five years after a U.S. budget year was -0.6 percentage points of GDP (an underestimate), and the average absolute error was 7.1 percentage points of GDP.

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