The International Monetary Fund says the war in the Middle East has deepened pressure on already stretched public finances, with the combination of higher interest rates and surging energy prices increasing calls for government support in emerging and developing economies.
In its latest Fiscal Monitor report, the IMF urged caution on policy responses and recommended against broad fuel subsidies as a tool to protect households from the consequences of a tighter oil market. Rodrigo Valdes, the IMF’s newly appointed fiscal affairs director, argued that subsidies risk masking the price signals needed for demand adjustment and recommended targeted, temporary cash transfers as a preferable alternative.
Valdes framed the policy trade-off starkly: "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," he said. He added that governments can allow higher energy prices to pass through and subsequently deploy other measures to help vulnerable households.
The IMF said it had trimmed its global growth forecast amid war-driven spikes in energy prices and disruptions to supply. The fund warned that if the conflict escalates and oil prices remain above $100 per barrel through 2027, global growth could be pushed to the brink of recession.
Valdes noted that the ultimate economic effects will depend on a number of contingencies tied to the conflict - including export controls, the degree of damage to energy infrastructure and whether other producers can meaningfully expand output. Those factors will shape both the scale of the shock and the policy responses warranted.
Debt dynamics and rising interest costs
Alongside the near-term shock from higher energy costs, the IMF highlighted a persistent rise in public debt. Global government debt reached 93.9% of gross domestic product in 2025, up from 92% a year earlier, and the fund now expects debt to hit 100% of GDP by 2029 - a projection that moved forward by one year compared with last year's outlook. The Fiscal Monitor noted that this would be the highest global government debt burden since the aftermath of World War Two.
Government debt is projected to continue increasing, potentially reaching 102.3% of GDP by 2031, according to the report. Interest payments have been climbing as well, touching nearly 3% of GDP in 2025 versus about 2% of GDP four years earlier.
Valdes warned of shifting patterns in debt markets, including a larger share of debt held by investors such as hedge funds, whom he described as "less firm hands to hold debt for the long run." He also noted that the average duration of debt has been falling, which makes short-term interest rate moves feed more quickly into debt-servicing costs.
Compounding fiscal pressures
The IMF identified several other forces weighing on public finances. Higher security spending, the costs associated with energy and climate transition, and rising interest bills are occurring at a time when revenues have not kept pace in many countries. The Fiscal Monitor also highlighted the risks posed by trade and financial fragmentation and by political instability, which could undermine reform efforts and revenue collection.
Market volatility can compound these pressures. The report warned that abrupt shifts in markets, including in sectors such as artificial intelligence-related stocks, have the potential to tighten financial conditions rapidly.
Policy advice and timing
Valdes urged governments to begin planning for fiscal consolidation once the immediate crisis has passed. While some countries have started to outline plans, he said many have not yet put forward clear strategies and even those that have must do more detailed work.
He cautioned that delay raises the eventual cost of adjustment: "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."
On policy choices during the energy shock, the IMF reiterated that temporary, well-targeted cash assistance is preferable to broad subsidies which blunt price signals and could leave global prices higher than they otherwise would be. Allowing prices to reflect scarcity, Valdes said, is important so demand can adjust appropriately.
The Fiscal Monitor lays out a compact of near-term and structural risks that policy makers must balance: stabilize economies and shield vulnerable households in the short run while keeping focus on medium-term debt trajectories and reform agendas.