The International Monetary Fund has downgraded its forecasts for the global economy. developmentwarning of high uncertainty and risks as unrest in the banking sector increases the pressure associated with the tightening of monetary policy and war in Ukraine.

Global GDP will grow by 2.8% in 2023 and 3% in 2024, down 0.1 percentage point from the corresponding forecasts in January, according to the World Economic Outlook quarterly update. In 2022 global economy increased by 3.4%.

“Risks are mostly downside, mainly due to banking turmoil over the past month and a half,” said Pierre-Olivier Guérinas, chief economist at the Fund. “For now, this is under control, but we are concerned that it could lead to a sharper and longer recession if financial conditions worsen significantly,” he added. According to Bloomberg, the fund sees a global inflation this year will be 7%, which is 0.4 percentage points higher than the January forecast, but lower than 8.7% in 2022.

As government debt continues to rise, rising interest rates and a strong dollar increase the cost of borrowing, which has negative implications for growth and poses risks to financial stability, the IMF warns in a blog post that examines what policies are right to reduce government debt.

Using data from two decades, IMF an appropriately adjusted fiscal contraction of 0.4 percentage points of GDP is estimated to reduce the debt-to-GDP ratio by 0.7 percentage points in the first year and to 2.1 percentage points after five years.

In advanced economies, the debt ratio is more likely to be reduced through spending cuts than through increased tax revenue.

But the timing of the fiscal adjustment could affect the outcome, the Fund argues.

In particular, the likelihood of debt reduction through fiscal adjustment increases when it occurs during a domestic and global economic boom, or during times when financial conditions are volatile and uncertainty is low. The IMF notes that beyond time frames, policy planning is also important.

In developed countries, in particular, the debt ratio is more likely to be reduced through spending cuts than through increased tax revenues. The chances of success also increase when fiscal adjustment accompanied by growth-enhancing structural reforms and a strong institutional framework.

This explains, according to the IMF, why fiscal adjustment has not usually led to lower debt ratios in the past: there were no proper conditions and accompanying policies.

According to the Fund, there are important factors why fiscal consolidation alone has not reduced debt levels about half of the time: First, fiscal adjustment tends to slow GDP growth. Second, exchange rate fluctuations and transfers to SOEs or contingent liabilities can undermine debt reduction efforts.

These “off-budget” actions can increase debt despite an improvement in the primary balance (which usually results in debt reduction). Such examples are, according to the IMF, the government’s emergency assistance to state-owned enterprises in Mexico (2016) and the liquidation of delinquent payments by the Greek government (2016).