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

On Tuesday, the International Monetary Fund (IMF) stated that low-income developing countries dealing with the consequences of the Iran war-fueled energy shock had "no choice" but to cut spending or face potential debt restructuring, according to Petya Koeva Brooks, the IMF deputy director of research. Speaking to AFP during the organization's Annual Meetings in Bangkok, Brooks emphasized that heavily indebted oil-importing nations were experiencing the worst effects of the energy shock and had to make difficult choices to support their citizens through the crisis.

She noted that debt levels had increased significantly and that inflation was a problem due to the prolonged impact of global economic shocks since the pandemic.

The Iran war has caused global energy prices to soar, as Tehran's retaliatory actions targeted the US' Gulf allies and disrupted oil and gas supplies. These rising energy costs have also affected crucial fertiliser supplies. The IMF advised countries to provide narrow, targeted subsidies and urged all governments to rebuild fiscal buffers and address rising debt.

Brooks stated that the IMF's messages applied to most countries, but the trade-offs and choices for the most vulnerable nations were more challenging. She highlighted that the consumption basket of these vulnerable countries is heavily weighted towards energy and food, making it much more difficult for them to cope with the crisis.

The IMF's World Economic Outlook, released on Tuesday, identified low-income developing countries that are net oil importers and not exposed to the AI technology investment boom as the most vulnerable to the Iran war's economic shocks. For these countries, the consumption basket heavily depends on energy and food, making it much more challenging for them to manage the crisis. Brooks stated, "Unfortunately, there is no other choice."

In its forecast for 2026 global growth, the IMF recognized that advanced economies would benefit from AI-related investments and economic activity, with growth outcomes varying depending on their exposure to the war and their integration into AI supply chains. The world's advanced economies were predicted to grow 2.1 per cent in 2026, with those involved in the AI supply chain, such as Taiwan and South Korea, experiencing significantly higher growth figures.

However, if AI investment activity were to slow down, the world economy could face a negative impact on output, not only in advanced countries like the US but also through trade linkages in Asia.

Lastly, climate-related risks were another significant aspect of the IMF's World Economic Outlook. Brooks mentioned that the effects of an intense El Niño phenomenon had already been considered in higher prices for certain food items, such as beverages and rice.