IMF Warns Vulnerable Nations Face Stark Choice: Cut Spending or Restructure Debt
The International Monetary Fund (IMF) has warned that low-income developing countries bearing a disproportionate share of the energy shock triggered by the conflict between the United States and Iran may have little room to manoeuvre, with many facing a stark choice: cut public spending or seek debt restructuring.
Petya Koeva Brooks, deputy director of research at the IMF, said heavily indebted oil-importing countries were among the worst hit. "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 told news agency AFP on the sidelines of the organisation's Annual Meetings in Bangkok.
The hostilities involving the United States and Iran have plunged the Middle East into conflict, sending global energy prices sharply higher after Tehran's retaliatory action targeted Washington's Gulf allies and curtailed oil and gas supplies. Those higher energy costs are now feeding into other goods, and the crisis has also affected supplies of fertiliser, a critical input for agriculture.
The IMF has recommended that governments respond with narrow, targeted subsidies rather than broad ones, while working to rebuild fiscal buffers and address rising debt accumulated during successive 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. "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. But unfortunately there is no other choice."
The IMF's World Economic Outlook, released on Tuesday, identified low-income developing countries that are net oil importers and are not benefiting from the ongoing artificial intelligence (AI) investment boom as the most exposed to the fallout. Many such countries are already in debt distress or close to it, Koeva Brooks said, adding that where debt is judged unsustainable, an orderly and timely restructuring is preferable to delay.
"Where debt is not sustainable, then resolving that debt and having orderly and timely restructuring is always better than waiting, because then the costs of restructuring down the road is going to be much higher," she said.
The same report raised the IMF's forecast for global growth in 2026, largely because advanced economies are enjoying a boost from AI-related investment and economic activity. Advanced economies are projected to grow by 2.1 per cent in 2026, with economies positioned in the AI supply chain, such as Taiwan and South Korea, posting significantly higher figures.
Koeva Brooks cautioned, however, that a slowdown in AI investment would hurt output, "not only in advanced countries like the US but again through trade linkages also in Asia". In the IMF's worst-case scenario, in which AI fails to deliver the promised productivity gains, global GDP forecasts for 2028 could be lower by as much as 0.4 per cent.
Climate-related risks also feature prominently in this year's outlook. Koeva Brooks said some effects of a particularly intense El Nino phenomenon had already been factored into higher prices for certain food items, including beverages and rice. El Nino, the warming phase of a natural climate cycle, raises sea temperatures in the tropical Pacific and can increase the risk of drought and flooding while worsening man-made global warming.
"Of course, it could turn out that the domino effect is even bigger than what we currently have," she said.
Taken together, the IMF's assessment points to a global economy recovering unevenly: advanced economies buoyed by technology investment, and poorer, oil-importing nations left to choose between protecting their citizens and keeping their finances afloat.
