The consequences of the Iran war dominate the meetings of the International Monetary Fund and the World Bank

Senior financial officials from around the world will meet in Washington this week in light of the ongoing war in the Middle East, which constituted a third major shock to the global economy after the Covid-19 pandemic and the comprehensive Russian invasion of Ukraine in 2022.

Senior International Monetary Fund and World Bank officials said last week they would lower their global growth forecasts and raise their inflation forecasts as a result of the war, warning that emerging markets and developing countries would be hardest hit by rising energy prices and supply disruptions.

Before the outbreak of the Iran war on February 28, both institutions expected to raise their growth forecasts given the strength of the global economy, even in the wake of the large tariffs imposed by US President Donald Trump starting last year. However, the war caused a series of shocks that will slow the pace of economic recovery and counter inflation.

Based on its basic estimates, the World Bank now expects growth in emerging markets and developing economies at 3.65 percent in 2026, down from the four percent it expected in October. However, it expects this rate to decline to 2.6 percent if the war continues for a longer period. Expectations indicate that inflation in these countries will reach 4.9 percent in 2026, up from the previous estimate of three percent, and may reach 6.7 percent in the worst case.

The International Monetary Fund warned last week that about 45 million more people may also face severe food insecurity if the war continues and continues to disrupt shipments of fertilisers, which are currently needed.
The International Monetary Fund and the World Bank are racing to respond to the crisis and support vulnerable countries at a time when public debt levels have reached record levels and budgets have become limited.

The International Monetary Fund said it expects demand for short-term emergency support ranging from $20 billion to $50 billion for low-income and energy-importing countries. On the other hand, the World Bank said that it is able to raise about $25 billion through crisis response tools in the near term, and up to $70 billion within six months, depending on the need.
But economists urge governments to use only targeted and temporary steps to alleviate the suffering of their citizens from rising prices, because broader measures may lead to increased inflation.

World Bank President Ajay Banga told Reuters, praising the efforts made in the field of financial and monetary controls that helped economies overcome previous crises, “Leadership is important, and we have overcome crises in the past… but this is a shock to the system.”
Countries now face the difficult task of achieving a balance between managing inflation, monitoring growth, and the long-term challenge of creating sufficient job opportunities for the approximately 1.2 billion people who will reach working age in developing countries by 2035.

The International Monetary Fund and the World Bank are also facing a completely different global landscape, as tensions are escalating between the United States and China, the two largest economies in the world, and the Group of Twenty, which consists of major economies, is suffering from a disability in its ability to coordinate the response.
The United States currently holds the rotating presidency of the G20, which also includes Russia and China, but it has excluded another member state from participating in the meetings, namely South Africa, which complicates the group’s ability to coordinate on this crisis.

Josh Lipsky, head of international economics at the Atlantic Council, said the situation was an attempt “to act on the basis of consensus when there is no consensus in the world right now on anything.”
Lipsky added that the comments of the International Monetary Fund, the World Bank and other multilateral lenders regarding the willingness to support countries severely affected by the war “are clearly aimed at reassuring the markets.”
He added, “It is a message to private creditors. This is not the time to flee countries suffering from financial problems. These countries will receive support from multilateral development banks and international financial institutions. This situation will not be like the Covid-19 pandemic, but rather it is something we can deal with.”

Difficult circumstances for many
Mary Svenstrup, a former senior US Treasury official who now works at the Center for Global Development, said that many emerging market and developing economies entered the crisis in worse shape than they were just a few years ago, with buffer margins declining, debt risks high, and reserves declining.
“We need this crisis to be an incentive for stakeholders in the IMF to really rethink how the Fund supports vulnerable countries, recognizing that we will see more global shocks,” she said.
“We cannot ask them to sacrifice growth and development in order to rebuild buffers,” she added.

Svenstrup said countries should implement more ambitious reforms if they receive new money. “More financial support from international financial institutions will likely be needed, but it must be affordable and come in the context of reform programmes, and perhaps also broader debt relief,” she said.
Martin Mühleisen, who previously headed the Strategy, Policy and Review Department of the International Monetary Fund and currently works at the Atlantic Council, agreed with this opinion and said that the IMF should work with donor countries to accelerate debt restructuring of borrowing countries and “get them out of the cycle of debt.”
He added that any new lending should be linked to a reliable road map for reducing debt.

Eric Pelowski, vice president at the Rockefeller Foundation, said that in 2025, low-income and lower-middle-income countries paid amounts to service their debts equal to twice what they were paying before the Corona pandemic, which limited the funds available for education, health care and other vital social programs. He added that half of these countries are now in or close to debt distress, up from a quarter just a few years ago.


He said, “This new conflict threatens any recovery achieved since the pandemic or since the Ukraine war, and pushes countries that were barely maintaining their balance and trying to avoid default to remain in a long-term trap of debt, growth and investment.”