Middle East war expected to overshadow IMF, World Bank meetings

WASHINGTON: Finance leaders from across the world are due to gather in Washington this week as the war in the Middle East adds fresh strain to the global economy, becoming a third major shock after the COVID pandemic and Russia’s full-scale invasion of Ukraine in 2022.

Senior officials at the International Monetary Fund (IMF) and the World Bank said last week they would cut their global growth projections and raise inflation forecasts because of the conflict. They warned that emerging markets and developing economies were likely to bear the brunt of higher energy costs and supply chain disruptions.

Before the Iran war began on February 28, both institutions had been expecting to raise their growth outlooks, citing the resilience of the world economy despite major tariffs imposed by US President Donald Trump starting last year. The conflict has since introduced a new series of pressures that are expected to slow efforts to restore growth and contain inflation.

The World Bank’s baseline forecast now puts growth in emerging markets and developing economies at 3.65% in 2026, down from 4% projected in October. It said that figure could fall to 2.6% if the war continues for a longer period. Inflation in those economies is now projected at 4.9% in 2026, compared with an earlier estimate of 3%, and could rise to 6.7% in a worst-case scenario.

The IMF also warned last week that about 45 million more people could face acute food insecurity if the war continues and keeps disrupting fertiliser shipments.

Both institutions are moving to address the latest crisis and assist vulnerable countries at a time when public debt is at record levels and fiscal space is limited. The IMF said near-term emergency financing demand from low-income and energy-importing countries could range from $20 billion to $50 billion. The World Bank has said it could make available about $25 billion through crisis response tools in the near term, with that amount potentially rising to $70 billion within six months if required.

Economists have urged governments to rely on targeted and temporary measures to cushion the impact of rising prices, warning that broader interventions could add to inflationary pressures.

Leadership matters, and we've come through crises in the past, World Bank President Ajay Banga told Reuters, praising fiscal and monetary measures that had helped economies navigate earlier disruptions.

Countries are now confronting the challenge of controlling inflation while also supporting growth and addressing the longer-term need to generate enough jobs for the 1.2 billion people expected to reach working age in developing countries by 2035.

The IMF and World Bank are also operating in a more fractured international environment, with tensions elevated between the United States and China and the Group of 20 major economies facing difficulty in coordinating a response. The United States, which currently holds the rotating G20 presidency, has excluded South Africa from participation even though it is a member of the bloc, further complicating coordination.

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 the statements from the IMF, World Bank and other multilateral lenders about their readiness to support countries affected by the war appeared intended to calm markets.

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.

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 in a weaker position than a few years ago, with smaller buffers, greater debt risks 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, he said countries receiving new funding should also undertake stronger reforms.

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 now at the Atlantic Council, also said the IMF should work with donor countries to speed up debt restructuring for borrowers and

He said any new lending should be linked to a credible plan for reducing debt.

Eric Pelofsky, vice president at the Rockefeller Foundation, said low-income and lower middle-income countries were paying twice as much to service their debts in 2025 as they did before COVID, reducing resources available for education, healthcare and other essential social programmes. He said half of those countries were now in or near debt distress, compared with a quarter only 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.