Governments burdened by rising public debt are increasingly turning to policies that suppress returns on savings and lower borrowing costs, as financial repression reaches its highest level in decades, the International Monetary Fund (IMF) has warned.

The IMF disclosed this in a Working Paper titled ‘The Coming Great Repression? New Measures and a Century of Evidence,’ which found that governments facing mounting fiscal pressures are relying more on measures that channel private savings into public debt as conventional debt-reduction options become more difficult to implement.

The paper, prepared by Marijn A. Bolhuis, Jakree Koosakul, Neil Shenai and Jie Yang, said the resurgence of financial repression has become more pronounced since the global financial crisis.

Financial repression refers to government policies that encourage or compel private savings to finance public debt at relatively low borrowing costs. These policies may include interest rate controls, high reserve requirements for banks and restrictions on capital flows.

According to the report, financial repression played a major role in reducing government debt after the Second World War and has re-emerged through both fiscal and monetary channels since 2008.

It found that indicators of financial repression tend to increase alongside rising public debt and periods of low or negative real returns on government debt.

The paper noted that fiscal repression could arise through prudential regulations that create sustained demand for government bonds, while the monetary channel may become more significant as central banks’ large reserve holdings increase the public sector’s claim on the financial system.

The IMF said governments may increasingly resort to such measures where political support for fiscal consolidation, structural reforms or debt restructuring is weak.

“Fiscal consolidation requires strong political cohesion and social support, both of which are increasingly scarce in
fragmented advanced-economy political systems,” the paper stated.

It added that debt restructuring, although an available option, could damage a country’s credit reputation and limit future access to international capital markets, making financial repression a more attractive alternative for some governments.

However, the IMF cautioned that the effectiveness of financial repression today may be more limited than in the post-war era because financial markets have become more open and sophisticated, with investors having greater access to alternative assets.

The report warned that while such policies may ease fiscal pressures, they also carry risks for financial development, private investment and long-term economic growth.

Against this backdrop, the IMF said governments still have conventional options for reducing debt, including fiscal consolidation, growth-enhancing structural reforms and debt restructuring, although each comes with significant economic and political constraints.

The paper added that the renewed rise in financial repression highlights the difficult trade-offs governments face as they seek to manage growing debt burdens while maintaining economic stability.