IMF Warns: Tariff Policies Could Exacerbate Debt Issues
On Wednesday, the International Monetary Fund warned that if fiscal revenues and economic output drop more than anticipated because of increasing tariffs and deteriorating growth outlooks, debt levels could surpass the current "debt-at-risk" estimates.
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The International Monetary Fund (IMF) indicated on Wednesday that a more significant decline in fiscal revenues and economic output than current forecasts, driven by rising tariffs and diminished growth prospects, may lead to debt levels exceeding the existing "debt-at-risk" estimates.
In a blog post accompanying the organization's latest Fiscal Monitor, IMF officials highlighted that "the series of recent tariff announcements by the United States, and countermeasures by other countries have increased financial market volatility, weakened growth prospects, and increased risks." They stressed that significant shifts in current policies are worsening global uncertainty.
According to the officials, "they come in the context of rising debt levels in many countries and already strained public finances, which in many cases will also need to accommodate new and permanent increases in spending, such as defense."
The officials added, "rising yields in major economies and widening spreads in emerging markets further complicate the fiscal landscape."
The IMF forecasts an increase of 2.8 percentage points in global public debt this year, pushing it above 95 percent of gross domestic product (GDP). This upward trajectory is expected to persist, with public debt approaching 100 percent of GDP by the end of the decade, surpassing levels experienced during the pandemic.
"Amid substantial policy uncertainty and a shifting economic landscape, debt levels could rise even further," IMF officials observed.
The Fiscal Monitor suggests that in a "severely adverse scenario," global public debt could soar to 117 percent of GDP by 2027, marking the highest level since World War II and exceeding reference projections by nearly 20 percentage points.
"Risks to the fiscal outlook have further intensified," officials stated. "Debt levels may rise even further than the debt-at-risk estimates if revenues and economic output decline more significantly than current forecasts due to increased tariffs and weakened growth prospects."
The blog also warned that "additionally, escalating geo-economic uncertainties could heighten debt risks, driving up public debt through increased expenditures, particularly in defense," emphasizing that there may be growing demands for fiscal support for those vulnerable to severe trade disruptions, thereby increasing spending.
According to the Fiscal Monitor, a marked rise in geo-economic uncertainty could push public debt up by around 4.5 percent of GDP in the medium term.
The report cautioned that tighter and more volatile financial conditions in the United States could create "ripple effects" for emerging markets and developing economies, potentially increasing their financing costs.
"This significantly impacts commodity prices, resulting in lower prices and heightened price volatility," IMF officials noted. They added, "limited fiscal improvements may further heighten risks from rising interest rates, especially as many countries have substantial financing needs. High interest rates could limit essential spending on social programs and public investments."
Furthermore, officials highlighted that "reduced foreign aid, due to shifting priorities among advanced economies complicates financing for low-income countries."
In light of these challenges, the IMF urged nations to prioritize strengthening their fiscal situations in an "uncertain and rapidly changing world." The organization recommended implementing prudent policies within robust fiscal frameworks to bolster public confidence and mitigate uncertainty.
Aarav Patel for TROIB News
In a blog post accompanying the organization's latest Fiscal Monitor, IMF officials highlighted that "the series of recent tariff announcements by the United States, and countermeasures by other countries have increased financial market volatility, weakened growth prospects, and increased risks." They stressed that significant shifts in current policies are worsening global uncertainty.
According to the officials, "they come in the context of rising debt levels in many countries and already strained public finances, which in many cases will also need to accommodate new and permanent increases in spending, such as defense."
The officials added, "rising yields in major economies and widening spreads in emerging markets further complicate the fiscal landscape."
The IMF forecasts an increase of 2.8 percentage points in global public debt this year, pushing it above 95 percent of gross domestic product (GDP). This upward trajectory is expected to persist, with public debt approaching 100 percent of GDP by the end of the decade, surpassing levels experienced during the pandemic.
"Amid substantial policy uncertainty and a shifting economic landscape, debt levels could rise even further," IMF officials observed.
The Fiscal Monitor suggests that in a "severely adverse scenario," global public debt could soar to 117 percent of GDP by 2027, marking the highest level since World War II and exceeding reference projections by nearly 20 percentage points.
"Risks to the fiscal outlook have further intensified," officials stated. "Debt levels may rise even further than the debt-at-risk estimates if revenues and economic output decline more significantly than current forecasts due to increased tariffs and weakened growth prospects."
The blog also warned that "additionally, escalating geo-economic uncertainties could heighten debt risks, driving up public debt through increased expenditures, particularly in defense," emphasizing that there may be growing demands for fiscal support for those vulnerable to severe trade disruptions, thereby increasing spending.
According to the Fiscal Monitor, a marked rise in geo-economic uncertainty could push public debt up by around 4.5 percent of GDP in the medium term.
The report cautioned that tighter and more volatile financial conditions in the United States could create "ripple effects" for emerging markets and developing economies, potentially increasing their financing costs.
"This significantly impacts commodity prices, resulting in lower prices and heightened price volatility," IMF officials noted. They added, "limited fiscal improvements may further heighten risks from rising interest rates, especially as many countries have substantial financing needs. High interest rates could limit essential spending on social programs and public investments."
Furthermore, officials highlighted that "reduced foreign aid, due to shifting priorities among advanced economies complicates financing for low-income countries."
In light of these challenges, the IMF urged nations to prioritize strengthening their fiscal situations in an "uncertain and rapidly changing world." The organization recommended implementing prudent policies within robust fiscal frameworks to bolster public confidence and mitigate uncertainty.
Aarav Patel for TROIB News
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