BANGKOK, Oct 14 — The International Monetary Fund (IMF) has issued an urgent call for advanced economies and others to reduce government spending, cut deficits, and lower debt levels, warning that delays would only make the job harder in coming years.
Its Fiscal Affairs department head Rodrigo Valdés said rising sovereign bond yields are adding to fiscal pressures at a time when average public debt was poised to hit 100 per cent of gross domestic product (GDP), the highest seen since World War Two, leaving countries with less margin for delay.
"We are saying now it is urgent and it is now because basically the conditions have changed," he said, noting the risks posed by inflationary pressures, high levels of global debt, and rising sovereign bond yields.
"So, if you want one message, we dialled up the urgency of our message," Valdés added.
Ahead of this week's annual meetings of the IMF and World Bank in Bangkok, he told Reuters that "the fiscal results this year are worse than expected six months ago, and worse than they were one year ago."
Most countries are now looking to boost spending instead of tightening their belts.
Need to build political support
Valdés said the challenge for major advanced economies with high debt levels is to build political support for concrete plans to contain borrowing costs in the medium term, and limit spillovers to the rest of the world.
"The more countries wait, the more painful the adjustment becomes," the IMF said in a blog release today. Delaying adjustments would increase interest burdens and fiscal vulnerabilities, further narrowing policy options.
It observed that financing conditions for many emerging market and developing economies had remained favourable but might not last, and urged those countries to reduce fiscal vulnerabilities and strengthen debt management.
Low-income countries, where external financing is already tighter, must strengthen their tax systems and improve spending efficiency.
High oil prices, persistent inflation, stronger investment demand and higher-than-expected artificial intelligence (AI) growth have driven sharp increases in long-term sovereign yields in recent months.
The IMF said the Group of Seven's (G7) average 10-year government bond yield rose more than 110 basis points between February and September, reaching its highest level in nearly two decades.
The effective average cost of government financing is projected to rise 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, up from 2.8 per cent of GDP before the COVID pandemic, roughly equal to projected Social Security spending.
That number is even higher in low-income countries, where interest payments today consume over 15 per cent of tax revenues, compared to an average cost of around nine per cent between 2011 and 2019.
Adding to the stress, governments in advanced economies are refinancing more debt at shorter maturities, causing higher rates to pass through to government costs more quickly. For the G7 and Spain, it said the share of debt maturing within one year is now approaching 30 per cent.
Inflation rates above target and higher energy prices mean central bankers will likely need to keep rates higher for longer, which in turn would limit governments' ability to respond to downturns, just as demands for increased spending on defence, energy security and ageing populations were mounting.
The IMF said interest rates on debt also now exceeded expected nominal growth rates in a number of countries, making it even harder for them to stabilise debt.
Valdés opined that more countries are allowing higher energy prices to pass through, but many still rely on costly, broad-based measures to shield their populations.
"Our estimate is that taken together, the fiscal cost of all these measures is about one half per cent of global GDP," he said, noting that a continuation of such measures will drive prices higher at the global level.
