The war in the Middle East has added further strains on an already fragile global fiscal situation, with higher interest rates and soaring energy prices already fueling calls for support from emerging markets and developing economies, the International Monetary Fund (IMF) said on Wednesday in its Fiscal Monitor report.
Rodrigo Valdes, the IMF's new fiscal affairs chief, said countries should eschew fuel subsidies to help their citizens deal with a shortage of oil and the corresponding surge in energy prices.
Targeted, temporary cash transfers that do not mask higher prices would be a far better option, he said.
"We don't have oil. We don't have energy. Energy needs to be more expensive for everybody, so that the adjustment happens and we consume less," Valdes told Reuters in an interview.
The IMF on Tuesday cut its growth outlook due to war-driven energy price spikes and supply disruptions, warning that the global economy could be driven to the brink of recession if the conflict worsens and oil stays above $100 per barrel through 2027.
"You can pass through (higher energy prices), and then you can do other things to help," Valdes said. "It's a global shock, and if countries suppress the price signal, the global price will be higher ... It's very important to give price signals so demand can adjust."
Valdes said export controls, the extent of damage to energy infrastructure and the capacity of other countries to boost oil output would shape the assessment of the war's impact and its policy implications.
Once conditions stabilized, he said it was critical that countries stay focused on longer-term challenges as public debt continued to increase, driven by expanded permanent spending on entitlement programs or reduced revenues, particularly in some of the largest economies.
Global government debt reached 93.9% of gross domestic product (GDP) in 2025, up nearly two percentage points from 92% a year earlier, and was expected to reach 100% of GDP by 2029, a year earlier than expected just a year ago, according to the IMF's latest Fiscal Monitor.
That would mark the highest government debt burden since the aftermath of World War II, the report said. Government debt was expected to keep rising and could reach 102.3% of GDP by 2031, it added.
Interest payments had also risen sharply, hitting nearly 3% of GDP in 2025, up from 2% four years ago, the IMF said.
Valdes warned of emerging risks, including a reshaping of debt markets that gives a larger role to investors such as hedge funds, who he said were "less firm hands to hold debt for the long run." The duration of debt had also been declining, which meant that short-term interest rates transmitted more quickly to debt dynamics.
Other challenges included higher security costs, energy and climate transition spending and rising interest bills at a time when revenues had not kept pace, the IMF said in a blog accompanying the report.
Trade and financial fragmentation could further sap growth and push up borrowing costs, while political instability may undermine reforms and revenue collection. Abrupt shifts in markets, including in AI stocks, could tighten financial conditions quickly.
Valdes said countries needed to start working on fiscal consolidation once the immediate crisis was resolved.
"There are some countries that are taking this seriously but many others we don't see yet a plan that is spelled out," he said, adding that even those with plans still had more work to do.
"We're not at a crisis point ... but the more you delay the measures, the steeper will be the effort that you need, and the higher the risk of having a disorderly consolidation later."