IMF warns higher borrowing costs are straining public finances worldwide

Rising sovereign debt and borrowing costs have prompted a fresh warning from the International Monetary Fund (IMF) about risks to the fiscal health of member countries, with 24-year highs in US Treasury yields expected to become one of the focal topics for central bankers and finance ministers gathering in Bangkok this week.

The average yield on 10-year government bonds across the Group of Seven economies increased by more than 1 percentage point between February and September this year, reaching its highest level in nearly two decades, according to an IMF blog post on Wednesday.

The US, France, Japan and other advanced economies have drawn attention in recent weeks as government bond yields climbed to multi-year highs, fuelling concerns about rising debt and spillover effects on emerging markets, a theme likely to feature at the IMF-World Bank annual meetings.

“Higher borrowing costs are adding to fiscal pressures at a time of high debt, making credible consolidation more urgent,” wrote Rodrigo Valdes, chief of the IMF’s fiscal affairs department, and deputy head Era Dabla-Norris.

Government bond yields are widely regarded as benchmarks for funding costs. Higher yields could attract capital into advanced economies, potentially raising the funding costs for emerging markets as well.

“In an increasing number of economies, interest rates paid for new debt now exceed expected nominal growth rates,” the IMF economists said. “Governments therefore need stronger primary balances to keep debt ratios from rising.”

The Washington-based lender was expected to release the latest edition of its Fiscal Monitor report on Wednesday, providing a fresh assessment of public finances across member economies, including debt-to-gross domestic product (GDP) ratios, a critical measure of fiscal risk.

Oil price shocks, persistent inflation, stronger investment demand and expectations that artificial intelligence could boost future economic growth had contributed to the rise in yields, according to the blog post.

While advanced economies had greater capacity to manage rising debt burdens, a trend had emerged in which governments around the world were spending an increasing share of tax revenue on servicing debt, it added.

US Treasury Secretary Scott Bessent, in a recent interview with US media, outlined plans to reduce federal debt after US government liabilities topped US$41 trillion.

Emerging economies were projected to spend almost 11 per cent of their tax revenue on servicing debt over the next five years, up from about 7 per cent between 2011 and 2019, according to the IMF. For advanced economies, the number was expected to exceed 9 per cent, compared with around 6 per cent during the earlier period.

The global primary deficit, the difference between a government’s revenue and expenses before interest payments, stood at about 3.3 per cent of GDP this year and was expected to widen further, the economists added.

“Emerging market economies should reduce fiscal vulnerabilities and strengthen debt management,” they said.

“For low-income countries where external financing is already tighter, strengthening tax systems and improving spending efficiency are essential to preserve priority spending.”