IMF economist warns on October 12 of financial repression risks to savers

International Monetary Fund (IMF) economist Neil Shenai has warned that governments facing mounting debt pressures could turn to financial policies that lower their borrowing costs while leaving ordinary savers with weaker returns. Shenai, of the IMF’s Strategy, Policy and Review Department, delivered the warning at the IMF–World Bank Group Annual Meetings in Bangkok on October 12, 2026.

“The reason I am raising financial repression in 2026 is that the conditions which historically led to its use are gradually re-emerging,” Shenai said. He cautioned, however, that a renewed wave of such policies was not inevitable.

Shenai presented research titled The Coming Great Repression? New Measures and a Century of Evidence, covering 17 advanced economies over a century. The study’s data end in 2020, meaning its historical findings do not directly measure developments in subsequent years.

The research presented by Shenai is an IMF working paper whose findings do not necessarily represent the views of IMF management or its Executive Board.

Financial repression shifts costs to savers

Financial repression allows governments to borrow more cheaply by using regulations to encourage or require banks and other financial institutions to hold government bonds at below-market returns, Shenai explained. The additional demand lowers public borrowing costs but can pass costs on to savers through weaker returns.

Under normal conditions, financial institutions allocate investments according to expected returns and risks, Shenai explained. Regulatory restrictions can instead leave them holding more government debt than they would choose on the basis of returns alone.

Shenai compared the mechanism to an indirect tax: resources move from savers to the state without an announced tax increase or a corresponding revenue item in the government budget. The burden can pass through banks to the people whose deposits and savings help fund their investments.

“When the financial system is placed under pressure by policies of this kind, someone inevitably has to bear the loss,” Shenai said. Banks’ liabilities are assets belonging to others, often savers, so the cost does not necessarily stop with financial institutions, he explained.

“Ultimately, it is savers who bear the burden of financial repression,” Shenai said.

Asked why cheaper government borrowing and less need for tax increases should be considered undesirable, Shenai explained that the research sought to measure financial repression rather than prescribe which debt-reduction tools governments should use, or to what extent. Previous research, including IMF studies, had already examined the costs of such policies extensively, he added.

Financial repression helped reduce post-war government debt

Shenai’s research identified financial repression as an important factor in debt reduction after the Second World War. Advanced economies emerged from the war in 1945 with public debt levels comparable to those seen today, yet reduced those debt burdens by approximately half over the following decade.

The research presented by Shenai estimated that financial repression contributed around 15 percentage points of gross domestic product (GDP) to debt reduction in advanced economies between 1945 and 1955, compared with about one percentage point from fiscal adjustment. Unexpected inflation also reduced the real value of outstanding debt.

“When advanced economies faced one of their highest debt burdens in a century, it was not fiscal deficit reduction or economic growth that brought debt down. It was financial repression, with savers bearing the cost,” Shenai said.

Financial repression was particularly pronounced around the Second World War, according to Shenai’s research, when governments used capital controls, interest-rate ceilings and strict controls on credit allocation. Restrictions on moving savings abroad helped governments secure domestic funding at low costs.

Shenai’s research traced a decline in financial repression through the 1970s and 1980s as the Bretton Woods system ended and many countries liberalised their capital accounts.

Post-crisis policies renewed demand for government debt

Financial repression began rising again after the 2008 financial crisis, as monetary policy and regulatory changes supported greater demand for government debt, according to Shenai’s research. The finding surprised researchers given how much more open the global financial system had become since the post-war period, he explained.

Shenai pointed to quantitative easing (QE), through which central banks in advanced economies bought large quantities of financial assets to stimulate their economies, alongside post-crisis regulations affecting institutions’ investment choices. Such policies could have valid economic and financial-stability purposes while also producing measurable side effects, he stressed.

“We are not questioning whether QE or these financial regulations are appropriate. We are pointing out that they have measurable side effects,” Shenai said.

Post-crisis policies could create “captive demand” for government bonds from investors whose choices were constrained, Shenai explained. Demand for public debt would therefore reflect regulatory requirements as well as market returns.

Shenai’s research also found that higher financial repression was associated with weaker private-sector credit and investment growth. Shenai explained that directing more funding towards government debt could leave less available for businesses seeking to expand, adopt technology or create jobs.

Banks pressured to hold government bonds at administered rather than market-determined yields might reduce private-sector lending, Shenai said. Although the study did not examine every aspect of that lending process, existing research linked bank profitability to the willingness to lend.

Shenai warned that requiring banks to hold more public debt could weaken their incentives or capacity to finance businesses. Where private investment could generate jobs and growth, diverting too much capital towards government funding could impose longer-term economic costs.

Shenai urges fiscal plans to avert a new wave of repression

Shenai urged governments to establish credible medium-term fiscal frameworks and deficit-reduction plans, alongside policies to strengthen economic growth. Acting before economic and political pressures narrowed their options could reduce reliance on indirect measures that imposed costs on the public, he argued.

Public debt in advanced economies had risen over the previous two decades because of persistent fiscal deficits, Shenai noted. Shorter average debt maturities also meant governments had to return to financial markets more frequently to refinance.

Governments relying more heavily on short-term borrowing needed continuing investor confidence to obtain affordable funding, Shenai explained. Historical experience showed that favourable lending terms could not always be assumed.

Shenai identified a “danger zone” where weak growth, the absence of credible deficit-reduction plans and political barriers to raising revenue or cutting expenditure coincided. Governments unable to pursue direct remedies might choose less visible alternatives that faced less political resistance.

Direct debt-reduction measures included policies to raise growth, increase tax revenues and reduce spending, an approach Shenai described as supported by the IMF because it could be debated openly and gain public acceptance through political processes.

Indirect alternatives included unexpectedly high inflation that reduced the real debt burden, central bank money creation to finance fiscal deficits, and financial repression that channelled savings into cheap government funding, Shenai explained.

Capital controls could also return to the policy debate if governments attempted financial repression on a substantial scale, Shenai said. Restrictions on moving savings overseas had helped make post-war policies effective, although how countries might address capital-account openness in future remained uncertain.

Shenai stressed that the research was a warning about choices and costs, not a prediction of an unavoidable second Great Repression. Credible fiscal plans and stronger growth, backed by public acceptance, could reduce governments’ need to rely on inflation surprises, central bank deficit financing or financial repression.

“I am not here to tell you that the world is about to enter a second Great Repression. What I am saying is that we still have an opportunity to act, and the time to act is now,” Shenai said.

Source: Krungthep Turakij