Economic shock of Middle East war to cast shadow over IMF, World Bank meetings

Top finance officials from around the world will convene in Washington this week under the shadow of the war in the Middle East, which has delivered a third major shock to the global economy after the COVID ​pandemic and Russia’s full-scale invasion of Ukraine in 2022.

Top officials at the International Monetary Fund (IMF) and the World Bank last week said they would downgrade their forecasts for global growth and raise their inflation forecasts as a result of the war, warning that emerging markets and developing countries will be hit hardest by higher energy prices and supply disruptions.

Before the Iran war broke out on February 28, both institutions had expected to lift their growth forecasts given the resilience of the global economy, even in the wake of major tariffs imposed by US President Donald Trump beginning last year. But the war has delivered a series of shocks that will slow progress on recovering growth and beating back inflation.

The World Bank’s baseline estimate now projects growth in emerging ​markets and developing economies of 3.65% in 2026, down from 4% in October, but sees that number dropping as low as 2.6% if the war lasts longer. Inflation in those countries was now forecast ​to hit 4.9% in 2026, up from the previous estimate of 3%, and could spike as high as 6.7% in the worst case.

The IMF warned last week that ⁠about 45 million additional people could also face acute food insecurity if the war persists and continues to disrupt fertiliser shipments needed now.

The IMF and World Bank are racing to respond to the latest crisis and support vulnerable ​countries, even as public debt levels have reached record highs and budgets are tight.

The IMF said it expects demand for $20 billion to $50b in near-term emergency support to low-income and energy-importing countries. The World Bank has said ​it could mobilise some $25b through crisis response instruments in the near-term, and up to $70b in six months, as needed.

But economists are urging governments to use only targeted and temporary steps to ease the pain of higher prices for their citizens, since broader measures could fuel inflation.

“Leadership matters, and we’ve come through crises in the past,” World Bank President Ajay Banga told Reuters, lauding work on fiscal and monetary controls that had helped economies weather previous storms. “But this is a shock to the system.”

Countries now face a ​tough balancing act, managing inflation while keeping an eye on growth and the longer-term challenge of creating enough jobs for the 1.2 billion people who will reach working age in developing countries by 2035.

IMF and World Bank also ​face a far different global landscape with tensions running high between the United States and China, the world’s largest economies, and the Group of 20 major economies hobbled in its ability to coordinate a response.

The United States currently holds the rotating presidency ‌of the ⁠G20, which also includes Russia and China, but it has excluded another member, South Africa, from participation, complicating the group’s ability to coordinate on this crisis.

“You’re trying to operate on consensus when there’s no consensus in the world right now on anything,” said Josh Lipsky, chair of international economics at the Atlantic Council.

Lipsky said statements by the IMF, World Bank and other multilateral lenders about their readiness to support countries hit hard by the war were clearly aimed at reassuring markets.

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“It’s a signal to private creditors. This is not a time to flee countries that are in problematic waters. They will have support from the multilateral development banks and the international financial institutions. This is not going ​to be COVID. This is something that we can handle.”

Tougher conditions for many

Mary Svenstrup, a former senior US Treasury official now with the Centre for Global Development, said many emerging market and developing economies entered the crisis worse off than just a few years ago, with lower buffers, higher debt vulnerabilities and lower reserves.

“We need to have this crisis be a catalyst for IMF stakeholders to really rethink how the Fund supports vulnerable countries with the recognition that ​we’re going to be seeing more global shocks,” she said. “We can’t ask them to sacrifice growth and development for the sake of rebuilding buffers.”

Svenstrup said countries should ​pursue more ambitious reforms if ⁠they received fresh funds. “There probably does need to be more financial support from the [international financial institutions] but it needs to be affordable, and it needs to be in the context of reform programs and potentially broader debt relief,” she said.

Martin Muehleisen, a former IMF strategy chief who is now with the Atlantic Council, agreed, saying the IMF should work with donor countries to accelerate debt restructuring for borrowers and “get them off the debt cycle”. New lending should be tied to a credible ⁠debt-reduction road map, ​he said.

Eric Pelofsky, vice president at the Rockefeller Foundation, said low-income and lower middle-income countries paid twice the amount to service their debts ​in 2025 than before COVID, limiting funds for education, health care and other critical social programs. Half were now in or near debt distress, up from a quarter, just a few years ago.

“This new conflict threatens any recovery that occurred since the pandemic or the Ukraine war, ​and it takes countries that have basically been treading water, trying to stay away from default, and keeps them in a long-term debt-growth-investment trap,” he said.