IMF warns higher borrowing costs are straining public finances worldwide

The International Monetary Fund (IMF) has issued a stark warning regarding the increasing strain on global public finances, driven by escalating sovereign debt and higher borrowing costs. The organization noted that yields on long-term sovereign bonds have become more volatile, with US Treasury yields reaching 24-year highs, a critical issue expected to dominate discussions among central bankers and finance ministers meeting in Bangkok.

Global public debt is once again on the rise, having briefly decreased from historic pandemic-era levels. Projections indicated that debt would reach World War II-era proportions by 2028 even before the recent conflict in the Middle East. This war has further exacerbated fiscal pressures by causing a surge in energy prices, tightening financial conditions, and slowing economic growth, with the duration of these pressures remaining uncertain.

Governments are facing difficult decisions to mitigate the impact of higher energy costs while maintaining fiscal space. Energy-importing nations, particularly low-income countries, are experiencing the most significant pressures. The cost of interest payments on government debt has surged by nearly half in just three years, increasing from approximately 2% to almost 3% of global GDP. This represents trillions of dollars that could otherwise be allocated to education, infrastructure, or other vital priorities. These increased debt servicing costs are compounded by new defense spending requirements amid growing trade and political uncertainty, coupled with security concerns.

Fiscal vulnerabilities also heighten risks to financial stability, leading to concerns about liquidity and potential disruptions in foreign exchange and other financial markets. Many large borrowers are increasingly relying on short-term debt to manage interest expenses, making them more susceptible to sudden shifts in short-term funding conditions. The issuance of more debt by advanced economies also has global repercussions, potentially reducing the availability of investor funds for other sovereign borrowers, especially as low-income countries face cuts in development assistance.

The IMF emphasized that rigorous fiscal prioritization is essential, both immediately and in the medium term, as demands on public finances continue to grow. While difficult, permanent reforms to unsustainable public pension systems and regressive fuel subsidies are crucial for freeing up funds to retire debt and enable transformative investments. The organization highlighted that countries can mobilize revenue and create fiscal space for modernizing digital infrastructure, education, and social safety nets, thereby benefiting from AI advancements while supporting displaced workers. Strengthening resilience to trade and energy disruptions, as well as natural disasters, is also possible while simultaneously reducing overall spending.

The IMF stated its commitment to supporting member countries in adapting to continuous global shocks and ensuring fiscal policy stabilizes their economies. It also assists in establishing processes like cost-benefit analyses for investment projects and multiyear budgeting to ensure efficient use of taxpayer resources for growth enhancement. For low-income countries, IMF expertise in revenue mobilization is helping to offset declining development assistance, with IMF financing aiding in weathering immediate crises and building long-term resilience. As populations age in some regions and youth cohorts grow in others, the IMF will continue to support policymakers in implementing structural reforms to unlock growth.