Staff papers

In 2022, the higher inflation is expected to increase the public debt burden

Higher inflation is deemed to reduce the public debt burden as it increases the denominator of the public debt-to-GDP ratio in value terms, thereby making it easier to repay any debt inherited from the past.

However, aside from this positive “mechanical” effect, the impact of higher inflation on the public debt-to-GDP ratio is more complicated. The public debt trajectory is dependent on the extent to which interest rates and the primary balance adjust to higher inflation.