IMF concerned by lack of sovereign debt reduction

Despite favorable economic conditions before war broke out in the Middle East, nations generally did little to reduce their debt, the International Monetary Fund said Wednesday, warning of decreased buffers for future crises.

"Growth performance had been pretty good from a global perspective, from a regional perspective," Era Dabla-Norris, a deputy director in the IMF's fiscal affairs department, told AFP.

"Despite positive growth news and surprises for many, many countries, there was no measurable progress that was made in bringing down debts and deficits," she said in an interview to coincide with the release of the Fiscal Monitor.

The semi-annual report, published Wednesday, paints an unflattering picture of the world's sovereign debt.

Globally, debt rose to almost 94 percent of GDP in 2025. If current trends hold, debt could surpass 100 percent of GDP by 2029 -- a level not seen since after World War II.

The conflict engulfing the Middle East has only added to pressure on finances.

Dabla-Norris said that even worse scenarios could see global debt-at-risk hit more than 117 percent of GDP.

 - Low buffers to face future shocks -
 "We're seeing governments thinking about -- or many governments announcing -- fiscal packages to support firms and households," as a result of the war, Dabla-Norris said.

Combining that with reduced economic activity, and history shows deficits and debts tend to rise, she said.

The risk is that these measures become entrenched over time, as was the case after the Covid-19 pandemic, she said, because "there seems to be, across the world, across political parties, fiscal expansion," rather than discipline.

"The end result is that countries don't have the buffers when the next shock comes."

The global trend toward higher indebtedness is being driven in large part by the two largest economies -- the United States and China --  whose deficits remain at high levels.

The Fund does not expect US policymakers to rein in spending any time soon, projecting a deficit of seven to eight percent of GDP over the medium term, before settling around five percent in 2031.

That would raise US debt from almost 124 percent of GDP in 2025 to more than 142 percent in five years. Since US debt is often used as a baseline to price all other sovereign debt, other countries may find it more difficult to access financing.

China is not much different, where the deficit hit 7.9 percent of GDP last year. Chinese debt is expected to increase from around 99 percent of GDP in 2025 to nearly 127 percent in 2031 -- largely due to deficits projected around six to seven percent.

According to the report, debt in China remains largely concentrated at the local and regional government level, giving the national government more room for maneuver. However, "China's fiscal space could narrow over time, limiting the government's capacity to respond to future shocks and weighing on overall prospects for debt sustainability," the report said. Dabla-Norris said the Fund had urged Chinese authorities to "really think about the kind of reforms that are needed," including on pensions, healthcare and taxes, to get its debt on a more sustainable path.

While the IMF is calling on most countries to clean up their fiscal house, Dabla-Norris did point to positive developments in Portugal, Spain and Greece. 

"There's been a dramatic turnaround from just even 10 or 15 years ago."