Top finance officials from around the world will convene in Washington United States (US) this week under the shadow of the war in the Middle East, which has delivered a third major shock to the global economy after the COVID pandemic and Russia’s full-scale invasion of Ukraine in 2022.
The United States (US) currently holds the rotating Presidency of the G20, which also includes Russia and China, but it has excluded another member, South Africa (SA), from participation, complicating the group’s ability to co-ordinate on this crisis.
Top International Monetary Fund (IMF) and World Bank officials last week said they would downgrade their forecasts for global growth and raise their inflation predictions as a result of the war, warning that emerging markets and developing countries will be hit hardest by higher energy prices and supply disruptions.
Before the Iran war broke out on February 28, both institutions had expected to lift their growth forecasts given the resilience of the global economy, even in the wake of major tariffs imposed by US President Donald Trump beginning last year. But the war has delivered a series of shocks that will slow progress on recovering growth and beating back inflation.
The World Bank’s baseline estimate now projects growth in emerging markets and developing economies of 3.65% in 2026, down from 4% in October, but sees that number dropping as low as 2.6% if the war lasts longer. Inflation in those countries is now forecast to hit 4.9% in 2026, up from the previous estimate of 3%, and could spike as high as 6.7% in the worst case.
The IMF warned last week that about 45 million additional people could also face acute food insecurity if the war persists and continues to disrupt fertiliser shipments needed now.
The IMF and World Bank are racing to respond to the latest crisis and support vulnerable countries at a time when public debt levels have reached record highs and budgets are tight.
The IMF said it expects demand for $20 billion to $50 billion in near-term emergency support to low-income and energy-importing countries. The World Bank has said it could mobilise about $25 billion through crisis response instruments in the near term, and up to $70 billion within six months if needed.
But economists are urging governments to use only targeted and temporary steps to ease the pain of higher prices for their citizens, warning that broader measures could fuel inflation.
“Leadership matters, and we’ve come through crises in the past,” World Bank President Ajay Banga told Reuters, praising fiscal and monetary controls that had helped economies weather previous shocks. “But this is a shock to the system.”
Countries now face a difficult balancing act, managing inflation while protecting growth, and addressing the longer-term challenge of creating enough jobs for the 1.2 billion people expected to reach working age in developing countries by 2035.
The IMF and World Bank also face a far more fragmented global landscape, with tensions running high between the US and China, the world’s largest economies, and the Group of 20 major economies increasingly constrained in its ability to co-ordinate a unified response.
–Reuters/ChannelAfrica–
