Key Points
- Global public debt is projected to reach 100per cent of GDP
- Rising bond yields are increasing government borrowing costs
- IMF urges fiscal reforms before debt pressures worsen
ISLAMABAD: International Monetary Fund (IMF) Managing Director Kristalina Georgieva on Wednesday called on governments to make “urgent repairs” to their public finances.
She warned that rising bond yields, mounting debt and inflationary pressures were leaving countries with less room to absorb future economic shocks.
“What is our loudest call to policymakers right now? Make urgent repairs to the fiscal house before the cracks widen,” Georgieva said at the annual meetings of the IMF and the World Bank in Bangkok.
Before her warning, the Fund urged countries to increase revenues, rationalise expenditure and improve public financial management to contain budget deficits and stabilise debt before borrowing costs rise further.
Rodrigo Valdés, head of the IMF’s Fiscal Affairs Department, said the deterioration in fiscal conditions had made action more urgent.
He told the media that fiscal results were worse than expected six months earlier and had deteriorated more than the level a year ago, while most governments were considering higher spending rather than tightening their budgets.
“We’re saying now it’s urgent and it’s now because basically the conditions have changed,” Valdés said, citing inflationary pressures, high global debt and rising sovereign bond yields.
“So, if you want one message, we dialled up the urgency of our message,” he added.
Rising debt and borrowing costs
The IMF has warned that average global public debt is on course to reach 100 per cent of gross domestic product (GDP), a level not seen since the Second World War.
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The growing debt burden is reducing governments’ ability to finance public services and respond to economic downturns.
Rising government bond yields have added to the pressure. Yields on 10-year government bonds across the Group of Seven (G7) major industrialised economies rose by more than 110 basis points between February and September. The yields have now reached their highest level in nearly two decades, according to the IMF. One basis point equals one-hundredth of a percentage point.
The Fund projects the average effective cost of government financing will increase to 3.7 per cent by 2031, from 2.3 per cent in 2021.
In the United States, interest payments are expected to reach 5.3 per cent of GDP, compared with 2.8 per cent before the Covid-19 pandemic.
The pressure is even greater in low-income countries, where interest payments now consume more than 15 per cent of tax revenues, compared with an average of about 9 per cent between 2011 and 2019.
Governments in advanced economies are also refinancing more debt over shorter periods, allowing higher interest rates to feed into borrowing costs more quickly.
IMF urges governments to act
The Fund called on heavily indebted advanced economies to develop credible medium-term plans to contain borrowing costs and limit the spillover of fiscal risks to other countries.
“The more countries wait, the more painful the adjustment becomes,” the IMF said in a blog published Tuesday. The Fund warned that delayed action would increase interest burdens, expose governments to greater fiscal vulnerabilities and narrow their policy options.
It urged emerging markets and developing economies to reduce fiscal vulnerabilities and strengthen debt management while financing conditions remained favourable. The IMF cautioned that these conditions might not last.
Low-income countries, where access to external financing is already more constrained, need to strengthen tax systems and improve the efficiency of public expenditure.
The IMF warned that debt stabilisation becomes harder when interest rates on government borrowing exceed expected nominal economic growth.
Countries in that position generally need stronger primary budget balances — the difference between government revenue and spending excluding interest payments — to prevent debt from rising relative to the size of their economies.
Energy costs add to fiscal strain
Higher energy prices and persistent inflation are adding to pressure on public finances.
The US war with Iran and disruption to energy markets have raised concerns about fuel costs, inflation and the expense of protecting households from price increases.
Higher inflation and energy costs may compel central banks to keep interest rates higher for longer, further increasing government borrowing costs and limiting their ability to respond to an economic slowdown.
