Banking News – With rising government debt and the highest bond yields in decades increasing pressure on economies, the International Monetary Fund (IMF) has urged advanced economies to take immediate steps to control debt. The Fund has stated that with global public debt reaching its highest level since World War II and trending toward exceeding 100 percent of the world’s total Gross Domestic Product (GDP), concrete efforts are necessary to reduce the debt burden.

Era Dabla-Norris, Deputy Director of the IMF’s Fiscal Affairs Department, speaking with AFP in Bangkok on Wednesday, stated that governments must create adequate space in their budgets to manage growing expenditures in areas including defense, aging populations, and other priorities. After the 2008 financial crisis, the COVID-19 pandemic, and wars in Ukraine and Iran, the debt-to-GDP ratio of advanced economies has increased significantly. Meanwhile, bond yields have increased by an average of about 110 basis points since the end of February.

On Tuesday, the yields on US 10-year and 30-year Treasury bonds reached their highest levels since 2002. Similar trends have been seen in other G-7 countries. Rising energy prices due to the Iran war and rising inflation expectations are the main reasons for the increase in bond yields. Dabla-Norris stated that since interest rates rise, the cost at which governments must borrow also increases, adding financial pressure on countries with high debt.

According to IMF research made public on Wednesday, government expenditure on interest payments worldwide was 2.3 percent of GDP in 2021 and is estimated to reach 3.7 percent by 2031. In the US, such expenditure is estimated to increase from 2.8 percent before the pandemic to 5.7 percent by 2031. Low-income countries are spending an average of 15 percent of their tax revenue on paying debt interest.

The IMF has suggested that to keep the debt ratio stable, governments must pursue fiscal consolidation and increase primary budget savings excluding interest payments. She stated that rising bond yields in advanced economies tighten global financial conditions, with risks of impact on emerging economies as well. Dabla-Norris emphasized that since expenditure cuts may be necessary during fiscal consolidation, governments must provide clear information to the public about its necessity and impact. She stated that a credible plan must be made to reduce debt, along with the commitments required for it and their impact must be explained to the people, warning that if steps are not taken now, the problem will be pushed to the future.