The International Monetary Fund (IMF) warns that countries with weak fundamentals and high indebtedness are more vulnerable to the upcoming increase in interest rates.
Heading into the Spring Meetings that begin next week, they warn that inflation and its volatility can increase the cost of borrowing. This process can happen quickly in countries with short debt maturities.
With sovereign debt risks elevated and financial constraints once again at the center of political concerns, a global cooperative approach is needed to achieve an orderly resolution of debt problems and avoid unnecessary defaults.
In an institutional blog, developed by the Director of Fiscal Affairs at the IMF, Vítor Gaspar, and Ceyla Pazarbasoiglu, Chief of Strategy at the IMF, it was highlighted that high public and private indebtedness contributes to financial vulnerabilities, which in themselves are worrying.
In the analysis they explained that the war in Ukraine is adding risks to unprecedented levels of public debt at a time when the pandemic continues to put pressure on many government budgets.
They suggested countries undertake reforms to improve debt transparency and strengthen debt management policies to reduce risks.
As described in the blog, 60% of low-income countries were at risk of debt distress.
“Muddling will amplify the costs and risks to debtors, creditors and more broadly, global stability and prosperity.”
And in the end, the impact will be felt more by households that can least afford it, they said.