The head of the International Monetary Fund warned on Wednesday that the world must prepare for a major economic hit should the Iran conflict continue to disrupt energy supply chains.
New forecasts released by the fund earlier this week showed it anticipates the world economy to slow from 3.3 per cent to 3.1 per cent this year. However the fund noted this is its most hopeful scenario and warned of a potential global recession should energy disruptions persist into next year.
“If the conflict persists and oil prices stay high for an extended period, we must brace for tough times ahead,” IMF managing director Kristalina Georgieva said during a press briefing.
The conflict is already hitting Middle East economies who received major downgrades in their forecasts. The fund lowered its outlook for the UAE and Saudi Arabia by 1.9 and 1.4 per cent, respectively, while it now anticipates contractions this year for Iran, Iraq, Kuwait and Qatar.
“I can say with great sorrow that the impact on the growth there is the most severe,” Ms Georgieva said.
Her remarks came during the IMF and World Bank spring meetings, whose discussions this week are dominated by the Iran war's economic fallout on the global economy.
After the US and Israel launched co-ordinated strikes against Iran in February that resulted in the death of supreme leader Ayatollah Ali Khamenei, Tehran has retaliated by launching thousands of missiles striking critical infrastructure in the Gulf and effectively closing the Strait of Hormuz.
The conflict has extended into Lebanon, where Hezbollah launched rocket attacks against Israel, which responded with strikes of its own. At least 1,500 people have been killed, according to Lebanese authorities.
Financial support
Ms Georgieva noted the war is having an uneven economic effect, with low-income countries and energy importers bearing the brunt of the burden.
She said the fund expects near-term demand for IMF financial support to range from $20 billion to $50 billion, which includes augmentations for some existing programmes. The IMF chief said there is also demand for new programmes for at least a dozen countries, with “a number of them” in sub-Saharan Africa.
On Tuesday, World Bank chief Ajay Banga said the institution could provide up to $100 billion for countries affected by the war, Reuters reported, which would surpass the funding it provided during the Covid-19 pandemic.
The fund has also upgraded its inflation forecast for the year and warned countries will be forced to struggle with the trade-offs of fighting inflation or providing fiscal support to boost growth.
“My advice: Look before you leap,” Ms Georgieva said.
She added that a short-lived conflict may not require central banks to raise interest rates.
IMF chief lauds Egypt response
The IMF chief said reforms undertaken by Egypt have left it in a better position to withstand the Iran war's economic shock.
Cairo has been implementing a series of reforms since entering a programme with the fund in 2022.
Egypt unlocked about $23 billion in funding after the completion of the fifth and sixth reviews of its economic reform programme.
The IMF said at the time that macroeconomic conditions were improving in the country as it implemented its stabilisation policies.
“It is very rewarding to see how Egypt, having implemented difficult reforms, is now in a better position to face this shock,” Ms Georgieva said.