By Huiyan Li UPI Topic - Business - UPI.com
WASHINGTON -- Escalating global uncertainty from rising tariffs and volatile financial markets has increased fiscal pressure on emerging markets and developing economies, which are already burdened by high debt levels, the International Monetary Fund warned Wednesday.
A recent series of tariff announcements by the United States, along with retaliatory actions from other countries, has "increased financial market volatility, weakened growth prospects, and increased risks", according to the latest Fiscal Monitor report released at the IMF's Wednesday press briefing in Washington.
This warning came as many emerging markets and developing economies grappled with elevated debt levels, largely a legacy of pandemic-era spending, and the tighter global financial conditions that followed.
Treasury Secretary Scott Bessent on the same day criticized the IMF and World Banks' role in helping these economies.
"For low-income countries in particular, both the IMF and World Bank should promote policy discipline for countries to strengthen their institutions, tackle corruption, and ultimately lay the foundation for sound investment so that they see a future that no longer relies on donor assistance," said Secretary Bessent.
In the Fiscal Monitor report, IMF economists estimated that global public debt would rise sharply this year, surpassing 95% of gross domestic product. They predicted the upward trend would persist, and debt levels could approach 100% of global GDP by the end of the decade, surpassing pandemic-era peaks.
This report only accounted for tariff announcements through April 4, so debt levels could rise even higher due to continued policy changes, the report stated.
"Debt levels are high in many emerging markets and developing economies, so interest expenses are commensurately very high," said Era Dabla-Norris, deputy director in the IMF's fiscal affairs department, in Wednesday's press briefing.
Meanwhile, the IMF warned that escalated uncertainty in the global economy, particularly trade tensions, could suppress consumption and production, slowing economic growth and reducing tax revenues.
In response, governments might need to allocate more funds for subsidies or emergency support measures to stabilize the economy, which could further increase fiscal deficits.
According to IMF projections, escalating geoeconomic uncertainty, including trade tensions and tariff shocks, could lead to a public debt increase by about 4.5% of GDP in emerging markets in the medium term.
In more extreme scenarios, the increase could reach 6% of GDP, Norris said.
Volatile financial conditions have added another layer of pressure to the most vulnerable nations.
"Financial conditions in the US, for instance, or other systemically important economies, can spill over into emerging markets and developing economies, and they can do so by raising sovereign borrowing costs," said Norris.
IMF research showed a 100 basis-point increase, or a 1% rise, in the U.S. Treasury yields could result in a similar rise in borrowing costs for emerging economies.
Vitor Gaspar, director of the fiscal affairs department at the IMF, highlighted a sense of urgency for governments to "keep their own fiscal house in order" amid elevated uncertainties. Countries should adjust fiscal policies domestically, according to their realities, to strengthen their resilience against external shocks.
Davide Furceri, division chief in the fiscal affairs department of the IMF, pointed out that the financial conditions of many emerging market development countries are characterized by default, with around 10% of their revenue being used for interest payments.
Furceri expected that foreign aid and investment flows would decline due to the default financial conditions, and suggested that the focus should be on increasing domestic revenue.
IMF experts pointed out that many emerging markets have significant potential for tax gains. An IMF research report in 2023 found that emerging market and low-income economies have significant untapped tax potential, estimated at 8% to 9% of their GDP.
Measures to increase tax gains included broadening the tax base, removing exemptions, and improving tax administration to enhance collection efficiency, said Furceri.
On the spending side, energy subsidies present a key area for reform, according to IMF Deputy Director Era Dabla-Norris.
"Many of these subsidies are highly regressive, so they don't necessarily benefit the poorest segment or the most vulnerable segments of society," said Norris.
Norris noted that energy subsidies, which account for about 1.5% of GDP on average in emerging and developing economies, could be reformed to free up fiscal resources, which could then be redirected toward social programs or critical infrastructure investments that are more visible to the public to help build greater trust in government reforms.
Furceri also pointed to the importance of pension reform, such as raising the retirement age, to generate fiscal savings and sustain employment.
"For pension, what we found is that strategic communication and stakeholder engagement are necessary," said Furceri.
For example, Furceri said some countries that successfully implemented reforms often presented increases in the retirement age as a way to preserve benefit levels.
"The important issue is to make sure that various stakeholders have a sense of the potential benefits and cost," Furceri said.
Copyright 2025 UPI News Corporation. All Rights Reserved.
