IMF dials up calls for urgent fiscal consolidation

By Andrea Shalal

BANGKOK, Oct 14 (Reuters) - The International Monetary Fund on Wednesday issued an urgent call for advanced economies and others to reduce government spending, cut deficits and lower debt levels, warning that delays would only make the job harder in coming years.

Rodrigo Valdes, head of the IMF's Fiscal Affairs department, said rising sovereign bond yields were adding to fiscal pressures at a time when average public debt was poised to hit 100% of gross domestic product, the highest seen since World War Two, leaving countries with less margin for delay.

"We're saying now it's urgent and it's now because basically the conditions have changed," Valdes said, noting the risks posed by inflationary pressures, high levels of global debt and rising sovereign bond yields.

"So, if you want one message, we dialed up the urgency of our message."    

Ahead of this week's annual meetings of the IMF and World Bank in Bangkok, Valdes had told Reuters that "the fiscal results this year are worse than expected six months ago, and worse than they were one year ago." The majority of countries were now looking at boosting spending instead of tightening their belts, he said. 

NEED TO BUILD POLITICAL SUPPORT

Valdes said the challenge for major advanced economies with high debt levels was to build political support for concrete plans to contain borrowing costs in the medium term, and limit spillovers to the rest of the world.

"The more countries wait, the more painful the adjustment becomes," the IMF said in a blog released on Wednesday. Delaying adjustments would lead to increasing interest burdens and fiscal vulnerabilities, further narrowing policy options.

Financing conditions for many emerging market and developing economies had remained favorable, but might not last, the IMF said, urging those countries to also reduce their fiscal vulnerabilities and strengthen debt management.

Low-income countries, where external financing was already tighter, needed to strengthen their tax systems and improve spending efficiency, the IMF said.

High oil prices, persistent inflation, stronger investment demand and higher-than-expected AI growth have driven sharp increases in long-term sovereign yields in recent months. The Group of Seven's average 10-year government bond yield rose over 110 basis points between February and September, reaching its highest level in nearly two decades, the IMF said.

The IMF said the effective average cost of government financing was projected to rise to 3.7% by 2031 from 2.3% in 2021. In the US, interest payments were expected to reach 5.3% of GDP, up from 2.8% of GDP before the COVID pandemic, roughly equal to its projected expenditure on Social Security. 

That number was even higher in low-income countries, where interest payments today consume over 15% of tax revenues, compared to an average cost of around 9% between 2011 and 2019.

Adding to the stress, governments in advanced economies were refinancing more debt at shorter maturities, causing higher rates to pass through to government costs more quickly, the IMF said. For the G7 and Spain, it said, the share of debt maturing within one year was now approaching 30%.

Inflation rates above target and higher energy prices meant central bankers would likely need to keep rates higher for longer, which in turn would limit governments' ability to respond to downturns, just as demands for increased spending on defense, energy security and aging populations were mounting.

The IMF said interest rates on debt also now exceeded expected nominal growth rates in a number of countries, which would make it even harder for them to stabilize debt.

Valdes said more countries were allowing higher energy prices to pass through, but many were still relying on costly, broad-based measures to shield their populations.

 "Our estimate is that taken together, the fiscal cost of all these measures is about one half percent of global GDP (gross domestic product)," he said, noting that a continuation of such measures would drive prices higher at the global level.    

(Reporting by Andrea Shalal and David Lawder; Editing by John Mair)