The International Monetary Fund (IMF) has warned that low-income developing countries grappling with rising energy costs linked to the Iran war may have little option but to cut public spending or risk debt restructuring. Speaking to AFP on the sidelines of the IMF’s Annual Meetings in Bangkok on Tuesday, the…...
The International Monetary Fund (IMF) has warned that low-income developing countries grappling with rising energy costs linked to the Iran war may have little option but to cut public spending or risk debt restructuring.
Speaking to AFP on the sidelines of the IMF’s Annual Meetings in Bangkok on Tuesday, the Fund’s Deputy Director of Research, Petya Koeva Brooks, said heavily indebted countries that rely on oil imports were bearing the brunt of the energy shock.
She said such countries faced difficult decisions as they sought to cushion their citizens from the economic impact of the crisis.
“Unfortunately, after years of the global economy being hit (by) shock after shock, debt levels have increased quite a lot, and at the same time, inflation has become a problem,” Brooks said.
The warning comes as the United States’ war on Iran has plunged the Middle East into conflict, driving up global energy prices and disrupting oil and gas supplies.
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Iran’s retaliatory actions have targeted Washington’s Gulf allies, further intensifying concerns over energy supply disruptions and their economic consequences, particularly for countries already struggling with high debt levels and inflation.
Those prices have begun to bleed into other goods, with the crisis also having an effect on crucial fertiliser supplies.
The IMF has called on countries to offer narrow, targeted subsidies in the wake of the crisis, while also recommending all governments work to rebuild fiscal buffers and address rising debt after years of fighting economic shocks since the pandemic.
“Our messages indeed apply to most countries, but again, the trade-offs and the choices that have to be made are much more difficult for the most vulnerable countries,” Koeva Brooks said.
The IMF’s World Economic Outlook, released on Tuesday, identified low-income developing countries that are net oil importers and are not exposed to the ongoing artificial intelligence technology investment boom as being the most vulnerable to the shocks from the Iran war.
“For those countries that are most vulnerable, this is where the consumption basket is heavily weighted towards energy and food, and so indeed it is much, much more difficult,” she said.
“But unfortunately there is no other choice.”
The senior IMF official added that “many” low-income countries were in debt distress, or close to it, and that they should seek debt restructuring if they were not able to address the issue.
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“Where debt is not sustainable, then resolving that debt and having orderly and timely restructuring is always better than waiting, because then the cost of restructuring down the road is going to be much higher,” she said.
‘Domino Effect’
In its World Economic Outlook, the IMF raised its forecast for 2026 global growth, largely on the back of advanced economies enjoying a boost from AI-related investments and economic activity.
Growth outcomes were highly uneven across economies, depending on their exposure to the war and whether they were integrated into AI supply chains.
The world’s advanced economies were forecast to grow 2.1 percent in 2026, with those in the AI supply chain such as Taiwan and South Korea posting significantly higher figures.
Koeva Brooks told AFP that if AI investment activity were to slow, the world economy “would see a negative impact on output, not only in advanced countries like the US but again through trade linkages also in Asia”.
In the IMF’s worst-case scenario — of AI not delivering promised productivity gains — global GDP forecasts for 2028 would fall by as much as 0.4 percent.
Climate-related risks were another key part of the World Economic Outlook this year, and Koeva Brooks told AFP that some of the effects of a particularly intense El Niño phenomenon had already been taken into account in higher prices for certain food items.
The warming phase of a natural climate cycle, El Niño raises sea temperatures in the tropical Pacific, triggering changes in weather that can increase the risk of drought and flooding, and exacerbate man-made global warming.
“We have a significant increase in beverage prices, in the prices of rice, and so on,” said Koeva Brooks. “Of course, it could turn out that the domino effect is even bigger than what we currently have.”
AFP