'No choice': IMF says developing countries must cut spending despite Iran war shock

The International Monetary Fund (IMF) has warned on Tuesday that low-income developing countries have "no choice" but to cut spending or face potential debt restructuring due to the energy shock caused by the Iran war. Speaking to AFP at the IMF's Annual Meetings in Bangkok, IMF deputy director of research Petya Koeva Brooks highlighted that heavily indebted oil-importing nations are facing the brunt of the crisis.

She explained that years of global economic shocks and rising inflation have led to increased debt levels, making these countries' choices in helping their citizens during the crisis difficult.

The Iran war has caused energy prices to soar, impacting crucial goods such as fertilizers. The IMF has advised governments to provide narrow, targeted subsidies while working to rebuild fiscal buffers and address rising debt after years of fighting economic shocks since the pandemic. Koeva Brooks emphasized that the trade-offs and choices for vulnerable countries are particularly difficult, stating, "But unfortunately, there is no other choice."

The IMF's World Economic Outlook identified low-income developing countries as the most vulnerable to the Iran war's shocks, as their consumption basket is heavily weighted towards energy and food. These countries, which are net oil importers and not exposed to the AI technology investment boom, are facing the most significant challenges. Koeva Brooks noted that debt restructuring is always better than waiting, as the cost of restructuring down the road would be much higher if debt becomes unsustainable.

In the IMF's World Economic Outlook, global growth for 2026 was forecast to be 2.1 per cent, with advanced economies benefiting from AI-related investments and economic activity. However, growth outcomes varied across economies, depending on their exposure to the war and AI supply chains. If AI investment activity were to slow, the world economy could see a negative impact on output, particularly in advanced countries like the US and Asia.

The IMF also considered climate-related risks, such as the effects of a particularly intense El Niño phenomenon, which has already led to higher prices for certain food items.