War in Iran to have lasting impact on world economy warns IMF

The conflict in the Middle East is expected to weigh on the global economy and plunge about 45 million people into food insecurity, with the risk of escalation, warned the Managing Director of the IMF, Kristalina Georgieva, on Thursday.

Kristalina Georgieva made these comments during her traditional curtain-raiser speech, which marks the start of the IMF and World Bank Spring Meetings in Washington from Tuesday to Friday.

The IMF is set to release an updated version of its World Economic Outlook (WEO) report on Tuesday, which is expected to reflect the impact of the conflict on the global economy.

While “we would have had to move towards an upward revision of global growth,” the war now means that “our best-case scenario now includes a downward revision of growth,” emphasized Ms. Georgieva.

However, due to the uncertainty, “it will include a series of scenarios ranging from a relatively rapid normalization” of the geopolitical situation “to one where oil and gas prices remain high for much longer and repercussions set in.”

The IMF chief added that the institution anticipates additional support from member countries “ranging somewhere between $20 billion and $50 billion, at the lower end if the ceasefire holds.”

But “it would have been worse without strong policies from most of the emerging economies (…) and we have the necessary resources to deal with this shock,” reassured Ms. Georgieva.

The sharp rise in energy prices and supply disruptions of oil, liquefied natural gas (LNG), and fertilizers, however, risk causing “food insecurity for at least 45 million people,” bringing the total “of people suffering from hunger to over 360 million,” expressed the IMF Managing Director.

“Even in the best case, there will be no clean and clear return to the situation before the outbreak of hostilities.”

– “Wait and Assess” –

At the same time, this new energy shock could “challenge the anchoring” of inflation expectations by markets, and “trigger a new cycle of costly inflation” for the global economies.

“Damages to infrastructure, supply disruptions, loss of confidence, and other effects” are the cause; “growth will be slower, even if the new peace is sustainable.”

However, the effect is not felt uniformly in all regions of the world, with a stronger impact on oil-importing and low-income countries with more limited fiscal margins.

“Let’s think about the Pacific island nations, at the end of the supply chain, who do not know if they will receive the energy they need due to these major disruptions,” added the IMF chief.

In a report released on Wednesday, the World Bank noted that Middle East countries had incurred “an immediate and serious economic cost” due to the war.

The region is expected to see its growth lowered by 0.6 points, compared to pre-war forecasts, to 1.8% in 2026, added the World Bank.

Faced with such a situation, governments “can assist in various ways,” assured Ms. Georgieva, but must avoid actions such as export controls or price controls.

For now, “there is an interest in waiting and assessing” how the geopolitical situation will evolve, but if inflation expectations change, “central banks must act decisively with rate hikes.”

As for fiscal policies, they can incorporate “very targeted demand support,” but “if and only if states have the necessary fiscal margins,” emphasized the IMF chief.