Developing countries spend more than 10% of their revenue on interest payments. As finance officials gather in Bangkok this week for the IMF and World Bank meetings, lower-income governments face renegotiating public debt at higher rates.
Debt and Austerity
“Countries are already cutting their expenditures because their debt payments are going high and because of the IMF conditionality,” said Iolanda Fresnillo, who works on debt justice for Eurodad. She warned that proposed changes to IMF loan programs could deepen the pressure. Under the new recommendations, the IMF would require fewer, deeper reforms before approving loans; lower-income countries fear those changes will bring painful austerity.
Kenya avoided debt restructuring by cutting public spending and trying to raise taxes, Fresnillo said. The changes prompted significant protests, especially among young people. She said the IMF risked losing credibility unless it acknowledged the severity of the crisis facing developing countries. “As long as they continue with the governance structure that they have, they are becoming less and less relevant,” she said.
The IMF says global public debt has reached its highest level since World War Two and will exceed 100% of GDP before 2030. Advanced economies, led by the United States, have the highest debt-to-GDP ratios. Emerging markets and low-income countries face capital outflows as investors seek higher US interest rates, alongside risks from El Niño and a lack of investment in AI.
G20 leaders suspended debt-service payments for the poorest countries during the early COVID crisis. But G20 diplomats say there’s little appetite to repeat that step now, as high debt and political pressures pose bigger obstacles.
War’s Costs Spread
The US-Israeli-led war with Iran and the closure of the Strait of Hormuz have triggered an energy supply shock, threatening already sluggish global growth. The closure cut off about 20% of the world’s oil supply. Diesel and fertilizer prices are soaring, and a looming “super” El Niño weather effect is adding pressure. Experts say it could cause 450,000 heat-related deaths.
World Bank President Ajay Banga said the Bank wasn’t revising its global forecasts, but was watching developments. “The real thing is not just El Niño by itself; it's the combination ... What's happening to fertilizer prices? What's happening to energy costs? What's happening to debt? It's that put together that creates its own challenges,” he told Reuters.
The IMF has signalled little change to its forecast of 3% global growth in 2026 and may raise its forecast for next year slightly. Ukraine, now in its fifth year of war against Russia’s invasion, and Gulf countries hit by Iranian strikes and sharply reduced energy exports are expected to see downgrades. IMF research released on Tuesday said sharp food and energy price spikes increasingly trigger crises, raising inflation expectations for longer, worsening poverty and threatening economic stability.
Government Measures and Their Limits
Group of Seven countries agreed, under pressure from US President Donald Trump, to release 100 million barrels of diesel and crude oil from emergency reserves. Trump wants lower gasoline prices before November elections that could see his Republican Party lose control of Congress. Since the war began on February 28, governments and companies have released more than 1 billion barrels of oil, mainly from onshore commercial inventories. Industry executives say accessible storage is running low, leaving the market more fragile and putting further pressure on prices.
On Friday, Trump announced a deal with Russia to provide more diesel to global markets, along with a temporary waiver of US sanctions designed to deprive Moscow of revenue for its war on Ukraine. Ukrainian President Volodymyr Zelenskiy criticised the move.
IMF Managing Director Kristalina Georgieva warned in a speech previewing the meetings: “Winter is coming.” The meetings are taking place outside Washington for the first time in three years. US Treasury Secretary Scott Bessent won't attend. A US official said he had sent two senior officials in his place while handling “domestic engagements.”