IMF warns higher borrowing costs are straining public finances worldwide

The International Monetary Fund (IMF) has issued a cautionary note about the impact of escalating borrowing costs on public finances globally. With the 10-year government bond yields in the Group of Seven (G7) countries hitting a 24-year high in September, central bankers and finance ministers are set to discuss the issue in Bangkok.

Rodrigo Valdes, head of the IMF's fiscal affairs department, emphasized that higher borrowing costs are exacerbating fiscal pressures amid already high debt levels, underscoring the need for urgent consolidation efforts. The surge in yields is attributed to factors such as oil price shocks, persistent inflation, increased investment demand, and optimism surrounding the potential economic boost from artificial intelligence.

While advanced economies have the capacity to manage rising debt burdens, a concerning trend has emerged where governments are allocating a larger share of tax revenue to debt servicing. Emerging economies are expected to spend nearly 11% of their tax revenue on debt servicing within the next five years, a significant increase from 7% between 2011 and 2019.

Advanced economies are projected to exceed 9% of their tax revenue dedicated to debt servicing over the same period. The global primary deficit, the gap between government revenue and expenses before accounting for interest payments, is currently at about 3.3% of GDP and is anticipated to widen further. For low-income countries, where external financing is already constrained, strengthening tax systems and improving spending efficiency are deemed crucial to safeguard critical spending.