Governments facing mounting debt are increasingly turning to policies that could keep borrowing costs low while reducing returns available to savers, the International Monetary Fund has warned.
The warning came in an IMF Working Paper titled The Coming Great Repression? New Measures and a Century of Evidence, which examined the growing use of financial repression across economies.
The News Chronicle reports that financial repression involves measures that encourage or require private savings to support government borrowing. These can include interest rate controls, higher bank reserve requirements and restrictions on capital movements.
The IMF warned that such a situation may occur more frequently in the future, especially after the 2008 global financial crisis, as governments face debt and the prospect of politically difficult fiscal adjustments.
These policies have been effective in reducing budget deficits and government debt after the Second World War, but the IMF warned that more sophisticated financial markets in recent years may weaken their impact.
The approach could also hurt private investment, financial development and long term economic growth by limiting returns and directing more capital towards government securities.
The IMF pointed out that governments have several policy options, including fiscal consolidation, economic growth, and debt restructuring, which may be difficult
The renewed focus on fiscal policy reflects the challenges governments face in balancing debt reduction, and social and financial stability.
