Zürcher Nachrichten - 'No choice': IMF says developing countries must cut spending despite war shock

Speaking to AFP on the sidelines of the organisation's Annual Meetings in Bangkok, IMF deputy director of research Petya Koeva Brooks said heavily indebted, oil-importing countries were facing the worst of the energy shock, and had difficult choices in helping their citizens through 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," she said.

The US war on Iran has plunged the Middle East into conflict and sent global energy prices soaring, as Tehran's retaliatory action targeted Washington's Gulf allies and curtailed oil and gas supplies.

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.

"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."

F.Carpenteri--NZN