IMF Warns Rising Interest Rates Could Deepen Global Debt Crisis

By Staff, Agencies

The International Monetary Fund [IMF] has warned that rising government borrowing costs are placing growing pressure on public finances worldwide, urging governments to adopt credible measures to rein in budget deficits as global public debt is projected to exceed 100% of global economic output by 2030.

In a blog post published on Wednesday, the fund said average yields on 10-year government bonds across the Group of Seven [G7] economies increased by more than one percentage point between February and September, reaching their highest levels in nearly two decades.

The IMF attributed the increase to several factors, including the oil price shock, persistent inflation, stronger demand for investment and expectations of economic growth associated with artificial intelligence.

High public debt, mounting spending commitments and expectations of substantial government bond issuance are also contributing to higher yields. The fund warned that rising borrowing costs in major economies could further strain debt conditions in other countries.

The effective average interest rate on government financing is projected to climb from 2.3% in 2021 to 3.7% by 2031, increasing the cost of servicing public debt.

In the United States, interest payments are forecast to rise from approximately 2.8% of gross domestic product before the COVID-19 pandemic to 5.7% by 2031, a level broadly comparable to projected spending on Social Security.

The pressure is particularly severe in low-income countries, where interest payments already consume more than 15% of government tax revenues.

The IMF warned that growing debt-servicing obligations are leaving governments with fewer resources for public investment and social programs while limiting their ability to respond to economic downturns.

The fund also projected that the global primary deficit, which measures the gap between government revenue and spending excluding interest payments, would reach approximately 3.3% of GDP in 2026. Reducing that figure to around 2.6% would be necessary to stabilize the global debt ratio.

According to the IMF, shorter debt maturities are accelerating the impact of higher policy interest rates on government financing, forcing some countries to refinance their obligations at more expensive rates sooner.

The fund urged advanced economies to establish credible fiscal plans to control deficits and stabilize debt, while calling on emerging markets to improve debt management and strengthen their financial resilience.

It warned that postponing corrective measures could leave governments facing the need for more substantial fiscal adjustments in the future, as higher borrowing costs continue to weigh on public finances.