IMF and World Bank to revise down global economic forecasts amid Gulf War. Which are the most vulnerable countries?
High-ranking financial officials from around the world will meet in Washington next week, in the context of the war in the Middle East, which has caused the world economy a third major shock after the COVID pandemic and the large-scale invasion of Ukraine by Russia in 2022, reports Reuters, taken by Agerpres.
In recent days, several officials from the International Monetary Fund and the World Bank have warned that they will revise down their forecasts for global economic growth but raise their forecasts for the advance of inflation as a result of the war, warning that emerging markets and developing countries will be most affected by rising energy prices and supply disruptions.
Before the Iran war broke out on February 28, both institutions were expected to upgrade their forecasts given the resilience of the global economy, even in the wake of additional tariffs imposed by US President Donald Trump. But the war in Iran produced a series of shocks that will affect economic growth and the fight against inflation.
Lower growth, higher inflation
Now the World Bank's baseline scenario points to 3.65% growth in emerging and developing economies in 2026, down from 4% in October, but warns that this figure will fall to 2.6% if the war drags on. Inflation in these countries is now forecast to reach 4.9% in 2026, up from the previous estimate of 3%, and could rise to 6.7% in the worst case scenario.
The IMF also warned last week that an estimated 45 million additional people could face acute food insecurity if the war persists and continues to disrupt now-needed fertilizer supplies.
The IMF and World Bank are rushing to respond to the latest crisis and support vulnerable countries at a time when public debt levels have reached record levels and budgets are under pressure. The IMF expects additional requests for emergency support worth $20 billion to $50 billion in the short term for low-income and energy-importing countries. For its part, the World Bank said it could mobilize about $25 billion through crisis response instruments in the short term and up to $70 billion in six months if needed.
“A shock to the system”
But economists are urging governments to use only targeted and temporary measures to cushion the impact of higher prices for their citizens, as wider measures could fuel inflation. “Leadership matters and we've been through crises in the past,” World Bank President Ajay Banga told Reuters, praising efforts at fiscal and monetary controls that have helped economies weather previous storms. “But this is a shock to the system,” warned Ajay Banga.
The task now facing the countries of the world is to manage to create a difficult balance between managing inflation while taking into account economic growth and the long-term challenge of creating enough jobs for the 1.2 billion people who will reach working age in developing countries by 2035.
The IMF and the World Bank also face a much different global landscape, with tensions high between the United States and China, the world's largest economies, and the Group of 20 slow to come up with a coordinated response.
More global shocks are expected
Mary Svenstrup, a former senior US Treasury official who now works at the Center for Global Development, said many emerging and developing economies entered the crisis worse off than a few years ago, with greater debt vulnerabilities and lower reserves.
“This crisis must be a catalyst for IMF shareholders to really rethink how the Fund supports vulnerable countries, recognizing that we will see more global shocks. We cannot ask them to sacrifice growth and development for the sake of replenishing reserves,” Svenstrup said.
She added that countries should pursue more ambitious reforms if they receive new funds. “Probably more financial support is needed from (international financial institutions), but it has to be affordable and it has to be in the context of reform programs and possibly wider debt relief,” Svenstrup said.
