IMF: Mideast War Threatens Global Debt Crisis

The International Monetary Fund (IMF) warned on April 15 that the ongoing conflict in Iran could drive a sharp rise in global public debt, with worldwide debt levels potentially reaching 100% of GDP by 2029. The IMF set out the projection in its half-yearly fiscal monitor, describing a path that would bring debt back to levels previously associated with the period after World War II.

Officials linked the fiscal risk to the war’s economic spillovers. The conflict began with US-Israeli airstrikes on February 28, and the IMF said the resulting disruption has pushed up energy and food prices. Those price increases, the fund said, are feeding into higher government borrowing costs and weaker economic growth across countries.

The IMF described the war as a new source of fiscal pressure that is affecting public finances through multiple channels. It said the conflict is disrupting energy supplies and contributing to tighter financial conditions globally. In the fund’s framing, these forces can raise the cost of funding budget deficits at the same time that growth slows, complicating fiscal planning for governments.

Against that backdrop, the IMF said policymakers face a difficult choice between providing relief to households hit by a cost-of-living crisis and preserving fiscal stability. The fund advised that any support schemes should be targeted and temporary, and should focus on the most vulnerable populations. It also urged governments to avoid broad, open-ended measures that could add to fiscal strain.

The IMF cautioned that countries with fragile public finances should not add further borrowing, warning that markets could react in ways that amplify instability. As an illustration of how quickly conditions can shift, the fund pointed to the UK’s 2022 fiscal episode, where fiscal slippages were followed by higher borrowing costs. The IMF said the current environment means higher debt and fiscal uncertainty can translate more rapidly into elevated interest rates.

To manage these pressures, the IMF urged governments to prioritize reallocating existing spending rather than taking on new debt. The fund’s message underscored that the combination of war-driven price shocks and tighter financing conditions can leave less room for error in fiscal policy. While the IMF set out a clear warning, the scale and timing of the debt impact remain uncertain and depend on how the conflict affects energy supplies, prices, and financial conditions going forward.