IMF warns of global fiscal strain as debt risks rise

The International Monetary Fund’s managing director, Kristalina Georgieva, warned governments that immediate steps are required to halt the erosion of fiscal positions before further economic stress takes hold. Addressing delegates at the IMF-World Bank Annual Meetings in Bangkok, she described the global economy as increasingly exposed to repeated shocks, with its capacity to absorb disturbances now approaching the limit. “Resilience is reaching its limits,” she declared. “Buffers—both energy and fiscal—are being depleted.” Rising inflation has compelled central banks to adopt tighter monetary policies, which in turn have pushed interest rates upward and heightened the cost of servicing debt.

The combined effect has pulled the world economy in opposite directions: on one side, energy disruptions stemming from the conflict in the Middle East have weighed heavily on growth, while on the other, surging demand for artificial-intelligence technologies has provided a countervailing boost. Georgieva framed this as a world where higher interest rates, geopolitical tensions, disrupted supply chains, and technological risks are converging, creating a uniquely volatile environment.

Some economies, especially those that are integrated into AI supply chains or that have escaped the direct impact of energy wars, are faring better than others. The hardest blows are being felt by low-income nations and fragile states that depend heavily on imported energy or that have been left out of the technology surge. These countries are experiencing the most severe financial strain, according to the IMF’s assessment.

For instance, nations like Thailand, Malaysia, Korea, and Singapore, closely tied to AI-driven industries, have shown greater adaptability, while energy importers in Africa and conflict-affected regions face acute vulnerabilities. Advanced economies are not immune to pressure either. Yields in these markets have climbed to levels not seen for many decades, tightening financial conditions worldwide. The Fund notes that many governments missed the opportunity to rebuild fiscal cushions during the post-pandemic recovery. Georgieva stated, “Too many countries did not use the post-pandemic recovery to rebuild fiscal buffers, and each new shock has pushed debt levels higher.

This time around advanced economies are the worst offenders.” The IMF attributes this partly to persistent inflation, stronger investor demand, and higher expected future borrowing costs, which have collectively strained public finances. The mounting strain is spilling over into emerging markets and low-income nations, where debt-service obligations have risen sharply. In some cases, the share of revenue devoted to servicing debt has more than doubled since a decade ago, from 6% to 14% of their revenues today.

Development assistance is also declining, risking the reversal of hard-won institutional gains in vulnerable economies. Georgieva emphasized that governments must act decisively to prevent broader economic damage. She urged policymakers to broaden revenue bases, rationalize spending, and strengthen public financial management. She also warned against the indiscriminate use of subsidies, particularly in the energy sector, because they can distort markets and deepen long-term vulnerabilities. “Protecting people is not the same as protecting the price of fuels,” said Rodrigo Valdés, director of the IMF’s fiscal affairs department.

He noted that fuel subsidies or measures preventing prices from adjusting to energy shocks are projected to cost countries between 1% and 1.5% of GDP in 2026. Valdés urged governments to rely instead on targeted social protection, using household data to identify those in need. The IMF’s fiscal monitor shows little evidence of fiscal consolidation this year. Valdés added, “Across major countries, there is little evidence of fiscal consolidation this year.

If anything, policy has been moving in the opposite direction.” Georgieva also addressed the accelerating adoption of artificial intelligence. “We tend to overestimate the short-term benefits of new technologies and underestimate the long-term gains.” She warned of cyber threats already materializing. “AI-enabled cyber-attacks are already a reality. I’m sure many of you have seen the news from France where cyber-attacks lifted up temperature in refrigerators, making it so that food is rotten.” The AI risks extend beyond households to financial stability. “They can also target the functioning of the financial systems and in that sense present a financial stability risk.” Authorities, she said, must act by strengthening “cyber resilience and address excessive concentration linked to the technology cycle.”