Debt trajectory worsens as fiscal buffers shrink
According to the report, global gross government debt climbed to nearly 94 percent of GDP in 2025 and is projected to hit 100 percent by 2029, levels last seen in the aftermath of World War II.
The deteriorating trajectory reflects persistent fiscal imbalances, rising interest costs, and new pressures stemming from the regional conflict.
The report cautioned that the war has introduced a fresh and significant strain on already stretched public finances, disrupting energy markets, tightening global financial conditions, and forcing governments into difficult trade-offs between protecting households from price shocks and preserving fiscal space.
The fiscal impact is expected to be uneven. Energy-importing countries, particularly low-income economies, are facing the greatest burden from rising fuel and food costs, while potential gains for exporters are more limited than in previous shocks, as major Gulf producers are affected by the conflict.
A key concern highlighted by the IMF is the shrinking fiscal buffer. The global fiscal gap, how far countries are from stabilizing debt levels, has narrowed sharply, falling from over one percent of GDP a decade ago to nearly zero today. This reflects structural policy shifts, including higher permanent spending and weaker revenue bases in major economies.
At the same time, debt-servicing costs are rising rapidly. Interest payments have increased from about two percent of global GDP to nearly three percent in just four years, as governments refinance debt at higher rates.
With borrowing costs expected to remain elevated, the report warned that weak fiscal positions and growing interest burdens leave little room for complacency.
Major economies and vulnerable countries under pressure
Major economies are at the centre of these pressures. The United States is running a fiscal deficit of 7–8 percent of GDP despite operating near full capacity, with debt projected to reach 142 percent of GDP by 2031, according to the report.
Moreover, China’s deficit has widened to nearly eight percent of GDP as authorities seek to support growth, with debt expected to climb to 127 percent over the same period.
Elsewhere, fiscal challenges persist. Emerging markets saw improved market access in 2025, supported by a weaker US dollar. However, debt levels remain elevated, with shorter maturities and reduced issuance among lower-rated borrowers.
Among low-income countries, fiscal pressures are particularly acute. Interest payments have reached record highs relative to revenues, while declining external aid is leaving financing gaps that many countries struggle to fill.
The IMF warned that risks to the fiscal outlook have intensified since 2025. Global debt-at-risk is now estimated at around 117 percent of GDP over the next three years, with significant downside risks.
The report warned that a prolonged Middle East conflict could increase this figure by an additional four percent, driven by higher energy prices, weaker growth, and tighter financial conditions.
The report also flags rising protectionism and geoeconomic fragmentation as growing fiscal burdens, as governments increase spending on industrial subsidies and trade support with uncertain economic returns. At the same time, rising social unrest is weighing on growth and widening deficits across countries.
Structural changes in sovereign debt markets are adding to vulnerabilities. As central banks scale back their bond holdings, private and often leveraged investors are playing a larger role, increasing the risk of market volatility.
Meanwhile, rising US Treasury issuance is increasing global borrowing costs, with spillover effects felt most acutely by countries reliant on external financing.
The IMF stressed that the window for orderly fiscal adjustment is narrowing. Advanced economies need credible consolidation plans, while emerging markets should prioritize reducing subsidy burdens, strengthening revenues, and addressing fiscal risks.
Prolonged war amplifies fiscal risks and debt pressures
The IMF warned that a prolonged war in the Middle East could significantly strain government finances worldwide, as rising energy costs, weaker economic activity, and tighter financial conditions combine to widen deficits and elevate debt risks.
The report said expenditure pressures would surge, particularly in countries with fuel subsidy regimes. Governments are likely to increase spending to shield households from higher global prices through subsidies, tax cuts, price controls, and absorbing losses via state-owned enterprises. Such measures, while easing the burden on consumers, transfer the full cost of external shocks directly onto public finances.
Subsidy burdens are expected to be especially heavy in the Middle East and North Africa, as well as sub-Saharan Africa, where limited price pass-through amplifies fiscal exposure.
During the 2022 commodity price surge, energy subsidy bills reached 2–4 percent of GDP in some countries. Additional fiscal strain could emerge from rising fertilizer costs, pushing up food-related spending in emerging and low-income economies.
On the revenue side, the report’s severe scenario outlined in the IMF’s World Economic Outlook April 2026 projects that global GDP could fall by 2.3 percent by 2027, weakening tax revenues, particularly in oil-importing countries.
Even oil-exporting Gulf economies may face negative fiscal impacts, as higher prices may not fully offset production disruptions and export constraints. In contrast, energy exporters outside the conflict zone, such as Canada, Norway, and Russia, could see temporary fiscal windfalls.
The report also highlighted the risks of stagflation, a combination of higher inflation and slower growth, which complicates debt dynamics. While inflation can mechanically reduce debt-to-GDP ratios, supply-driven price increases tend to erode real incomes and corporate profits, limiting tax revenue gains. At the same time, tighter monetary policy raises borrowing costs, especially for countries with high levels of short-term or variable-rate debt.
For oil-importing economies, including Egypt, the report noted that the negative effects of higher interest rates and weaker growth are likely to outweigh any debt-reducing benefits of inflation.
The report showed that oil supply shocks could raise sovereign borrowing spreads for oil-importing emerging markets by around 40 to 50 basis points over several quarters, while oil exporters see little statistically significant impact.
In a severe conflict scenario, global debt risks could rise sharply. The report estimated that the upper range of global public debt could increase by four percent of GDP by 2027 compared to baseline projections. Emerging markets and developing economies would be hit hardest, with debt-at-risk rising by 6.2 percent, versus 2.8 percent for advanced economies.
Beyond the immediate impact of war, the report flagged rising geoeconomic fragmentation and protectionism as additional fiscal risks. Trade restrictions have surged to levels 50 percent higher than before the COVID-19 pandemic, weighing on investment, productivity, and growth. Historical evidence suggests tariff increases can reduce economic output and raise unemployment, further straining public finances.
Geopolitical tensions are reshaping fiscal priorities, with more resources being directed toward defence and strategic industries, often at the expense of productivity-enhancing spending. According to the report, rising geopolitical fragmentation could increase public debt by around 1.5 percent of GDP in the medium term, with emerging markets facing significantly larger impacts.
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