Middle East war, high debt levels to dominate IMF-World Bank meetings in Bangkok

Finance officials from around the globe will convene in Bangkok this week amidst the backdrop of an escalating Middle East conflict, the most significant disruption to energy supplies ever, and surging interest rates, which collectively present formidable challenges to an already sluggish global economic recovery. The ongoing conflict between the United States and Iran, now in its eighth month, is expected to take center stage during the annual meetings of the International Monetary Fund and World Bank, marking the first time the meetings are held outside Washington in three years.

US Treasury Secretary Scott Bessent will not be present, having sent two senior officials in his place to handle domestic matters. His absence from the high-profile gathering could be construed as frustrating by his peers, especially considering the rising tensions surrounding the Iran war, Ukraine's struggle against Russia's invasion, and the United States' decision to impose sanctions on the International Criminal Court.

World Bank President Ajay Banga expressed to Reuters that while global growth managed to outperform expectations when Iran closed the Strait of Hormuz, curbing approximately 20% of the world's oil supply, new pressures are beginning to surface. Escalating diesel and fertilizer prices, in addition to an impending super El Nino weather phenomenon, which experts predict could result in half a million heat-related deaths, are all contributing to the current predicament.

The Group of Seven nations agreed to release 100 million barrels of diesel and crude oil from emergency reserves, under the influence of US President Donald Trump, who seeks to lower gasoline prices ahead of the November elections. Trump also signed a deal with Russia, providing more diesel and granting a temporary waiver of sanctions aimed at preventing Moscow from generating revenue from its war in Ukraine. This move drew swift criticism from Ukrainian President Volodymyr Zelenskiy.

Banga stated that the World Bank is not revising its global growth forecasts downward at the moment, but is closely monitoring the situation. The real issue, according to him, is not just El Nino on its own; it is the combination of factors like rising fertilizer prices, energy costs, and debt that creates its own set of challenges.

IMF Managing Director Kristalina Georgieva echoed a similar warning in her introductory speech, urging everyone to be more cautious and prepared for the upcoming months. The IMF has hinted at minimal changes in its forecast for a 3% global growth rate in 2026, with a slight increase for the following year. However, some countries, including Ukraine in its fifth year of war against Russia's invasion, and Gulf nations affected by Iranian strikes and reduced energy exports, will likely see downgrades.

IMF research released on Tuesday revealed that sharp increases in food and energy prices often act as a catalyst for longer-lasting inflation expectations, exacerbate poverty, and threaten economic stability. One major concern for policymakers is the burgeoning public debt burden, which is at its highest level since World War Two and is projected to surpass 100% of GDP before 2030.

Advanced economies, led by the US, have the highest debt-to-GDP ratios, but emerging markets and low-income countries are particularly vulnerable due to a perfect storm of challenges, including capital outflows in search of higher US interest rates, El Nino, and insufficient investment in artificial intelligence, which has mitigated negative supply shocks in the US and other wealthy countries.

Developing countries are especially susceptible to the high public debt levels, as they will need to renegotiate their debt at higher interest rates. Interest payments currently exceed 10% of revenue in developing countries on average. Following the onset of the Covid crisis, G20 leaders suspended debt service payments for the poorest countries, but there is little appetite for such action now, as high debt levels and political pressures pose significant hurdles this time around.

Many lower-income nations are apprehensive about the IMF's new recommendations for loan programs, which propose fewer but deeper reforms as a prerequisite for lending, a change that many fear could lead to painful austerity measures. Some countries, such as Kenya, have managed to avoid debt restructuring by curbing public expenditures and raising taxes, but these measures sparked significant protests, particularly among the young.

The IMF risks losing its credibility unless it acknowledges the severity of the crisis faced by numerous developing countries. As long as the current governance structure persists, the IMF is becoming less relevant, according to Iolanda Fresnillo, who works on debt justice for Eurodad. She further stated that the IMF might lose credibility if it continues with its existing governance structure.